Global property bubble fears mount as prices and yields spike
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Fears of a renewed global property bubble are rising as prices and yields hit records last seen before the financial crisis, according to new data.
The pricing of real estate around the world had become “increasingly aggressive”, research company MSCI said. This is particularly the case in the US, where investors’ returns from rental income are now lower than before 2008, when a crash in massively overleveraged property triggered an international banking slump.
Globally, property generated total average returns of 9.9 per cent in 2014 thanks to rapid capital value appreciation, MSCI found — the best performance since 2007 and the fifth consecutive year of increasing returns.
The spiralling price of property assets in the world’s biggest investment markets was raising “increasing concerns over its sustainability”, said Peter Hobbs, research managing director at MSCI.
“Most global markets are at or close to historic low [yield] levels,” he said. The yield expresses rental revenue as a proportion of a property's value. As values rise, yields fall.
The main factor behind the pricing is “exceptionally low” bond yields, which made property much more appealing to investors in relative terms, Mr Hobbs said, citing “frenzied buying”.
Jonathan Gray, global head of real estate for Blackstone, the world’s largest private real estate investor, said on Wednesday he was confident the market was not nearing a bubble.
“Are we at top peak bubble? I don’t think so,” he told a conference in New York. “I think today we’re firmly in the middle of the real estate cycle. We’re only about half way to the ‘06, ‘07 activity, but clearly we’re past the distress from 2009.”
Mr Gray just made a $26.5bn bet on the global property market with the acquisition of GE’s commercial real estate portfolio, with assets ranging from shopping centres in Mexico to joint venture assets in Bulgaria. The deal “made a lot of strategic sense for us”, he said.
He said he saw values continuing to grow but at a more moderate pace than that of the past few years, in light of expected interest rate rises in the US.
MSCI found listed real estate companies had also significantly outperformed the world’s booming equity markets. Globally equities generated a 10.4 per cent return, but property stocks returned 19.5 per cent.
The findings will add to fears that central banks’ quantitative easing programmes are fuelling price bubbles in a number of asset classes.
European quantitative easing was likely to boost real estate prices further, Mr Hobbs warned. “QE is sucking in real estate capital because debt finance is so cheap,” he said.
A combination of QE, a lack of other high-yielding investment classes and the prospect of rising rents is set to fuel the trend further, Mr Hobbs predicted.
“We are pretty close to the previous market top in terms of pricing, but rental income growth has not really come through yet so that could support further growth in the coming years,” he said. “If the US keeps doing what it has been doing for the past five years and Europe catches up, then we are set for another strong year [in 2015].”
The renewed boom first appeared in high-quality assets in leading US cities and in London. UK real estate returned 17.9 per cent in 2014 while the US returned 11.5 per cent.
In London returns topped 20 per cent.
Several of London's biggest buildings have changed hands in the past year for record prices, including the Gherkin and the HSBC Tower in Canary Wharf. London also saw a close-fought power struggle over the Canary Wharf estate itself, which resulted in the Qatar Investment Authority and Canadian investors Brookfield winning control.
Although these markets are still seeing exceptionally strong investor demand and consequently asset prices and income yields are back at historic record levels, the voracious spending — dubbed a “wall of capital” — has now spread out into riskier markets.
“People are moving up the risk curve into riskier locations and taking on higher levels of debt and more challenging development activity,” Mr Hobbs said. “When you’re at or near the top of the cycle that is not necessarily a good thing to be doing.”
In the past year investment cash has poured into continental Europe — particularly the periphery — MSCI found.
After a record slump, sharp price rises in Dublin drove the total return in its real estate markets to hit a record 44.7 per cent — the best performer of all world cities in MSCI’s analysis.