A dearth of deals in the UK office investment market means transactional price tags still lag the drops seen in asset values and listed property prices, according to analysis from index company MSCI.
Different market pricing, valuation and liquidity metrics for the UK office market’s downturn over the past year “all show some degree of slowdown”, said MSCI Research executive director Tom Leahy in a new blog post.
Leahy added: “But the magnitude of this slowdown differs and each tells a valuable part of the story about how UK offices have been affected by the new higher interest rate regime.”
The RCA Commercial Property Price Indexes and RCA Hedonic Series track transaction prices and show what Leahy called “a modest decline” of between 10% and 15% over the 12 months through March 2023.
“The declines are modest in part because the transaction market has become highly illiquid and the assets that are trading tend to be better quality, thus limiting the scope for wider price falls,” he said.
“A larger spread of assets would have to trade for a greater drop to materialise, which may happen if buildings are forced onto the market because of distress and refinancing challenges.”
MSCI measures that quantify such market illiquidity are its liquidity score, which measures the depth and breadth of capital actively acquiring assets, and its modelled bid-ask spread, which estimates the gap between buyer and seller reserve prices based on transaction data.
The former fell close to 20% over the period under review, while the latter dropped by nearer 30%, showing what Leahy called “a significant disconnect between where buyers think UK office market pricing should be and where sellers are willing to trade”.
The MSCI team then combined the modelled bid-ask spread and the CPPI to create a spread-adjusted transaction price index, which suggests “a much bigger fall” than the actual CPPI, at almost 25%.
“This approach shows where the market clearing price would be if prices adjusted in accordance with the buyers’ reserve price and demonstrates buyers would require a bigger discount than is currently available to come back into the market and move liquidity to its long-run average, according to our model,” Leahy said.
“Prices have not shifted that much so the market remains illiquid, with a substantial gap between buyers and sellers.”
Other “pieces of the puzzle”, Leahy said, include the MSCI UK Quarterly Property Index, which shows a drop in asset values greater than that indicated by transaction-price data, and the performance of listed property companies, which is “down significantly”.
“These MSCI pricing, valuation and liquidity measures mean investors can avail of a more rounded view of the global real estate market as they assess risk and opportunity,” Leahy wrote.
“This becomes even more vital at times of uncertainty and illiquidity, when corrections in pricing and valuations have tended to run at a different pace.”
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