Has a downward yield shift begun? Almost certainly. Why? For the same age-old reasons. Demand for investment properties looks set to outstrip supply for the medium to long term.
With a relative lack of development and a static number of blue-chip covenants, the supply side will remain fairly inelastic in the short to medium term. Demand, however, looks set to rise. The driver here, of course, is pension and insurance policy cash seeking haven from a toppy equity market and better returns than the anorexic gilt market can deliver (News, p41).
Investment funds figured this out last autumn, but were still spooked by the summer crash in the equity market. So they closed the chequebooks until after Christmas – and the January launch of the euro. The equity market has recovered, for now, restoring the rather false equities-to-property ratio beloved of fund trustees. But of more fundamental importance is the perception, thanks to the euro, that in the long-term, interest rates will go under 5% and stay there.
So, funds are ratcheting up property weightings for their new financial year. Those with December year-ends are now active. A lot more have March year-ends. Expect even more pre-buying activity in March.
Should owners now sell? They have three questions to ponder. How far down will continuing demand drive down yields? Answer: like mortgages, the lower they go, the slower they will fall. What will happen to equities (and overall confidence) in a market that reached record highs this week? Answer: nobody has a clue. Will the euro (whether we go in or stay out) bring long-term low interest rates and the likelihood of slow rental and capital growth? Answer: probably.
It’s a fine call. But selective selling doesn’t sound such a bad idea.
