“Greek crisis puts brakes on bond and share sales” I read in the press this month. Markets had come to an abrupt halt as they wait to have more clarity.
Further down, I read that because of low levels of equity and bond issuance, an initial public offering of a German real estate company had been postponed, as well as the sale of a well-known German real estate bank.
That volatile capital markets have always impacted our real estate markets is well known. What seems to have changed is the speed and depth of that impact. It seems to me that the linkages are stronger and more direct.
Currency markets, bond markets and stock markets are heavily intertwined and their links with our real estate markets are becoming stronger and changing the characteristics of real estate.
More importantly, over the last few years all these markets have been propelled upwards to a large extent by an excessive injection of money into the global economy. This increased global liquidity has been chasing down yields, and accepting greater risk as the appetite for returns gets stronger, a trend that has brought with it more volatility.
It seems to me that the liquidity has landed on European shores by default because the US markets have been heating up while Asian and emerging markets have been suffering.
The vessels that have brought it over have been, to a large extent, those of large global alternative investment managers and hedge fund managers, who have had a harder time finding returns in their traditional markets. These players’ expertise lies in the broader capital markets and are driven by a macroeconomic view: GDP, unemployment, exports and other indicators making this “bubbly” market upswing more vulnerable to a change in investor sentiment. A rise in US interest rates, a slowdown of the US economy or a rise in emerging markets may shift capital out of our market at huge speed.
The major difference with real estate as an investment medium is that it is more difficult to get into but, more importantly, it takes more time to get out of. However, these new players are used to getting an instantaneous market price and liquidity.
They are always looking forward to the next investment proposal and may accept reduced pricing to get their liquidity. They are probably right as they could probably make up their loss easily by capturing profits elsewhere in other markets.
Debt levels are not as high as they were during the last cycle, which has given people comfort. This is an equity bubble, a friend told me, and therefore we should be all right – for if there were to be a market correction, investors will still have equity in the deal and so will be more patient. That may be true, unless you belong to the alternative and hedge investors mentioned above.
Speaking of debt, the impressive resurgence of the commercial mortgage-backed securities market is linked completely to investors’ appetite for paper. Experience has taught us that this appetite can vary quite a bit, which adds another strong linkage between our markets and capital markets.
This resurgence also means that the characteristics of our market are changing rapidly and becoming more volatile. The danger is that the traditional property investor may not notice the warning signals if they focus purely on the conventional property investment measures of supply, demand, vacancy and rental levels.
Keeping a sharp eye on global capital markets is becoming increasingly important in today’s real estate world because the behaviour of global capital is where we will get our signal to go into or come out of our real estate market.
Aref Lanham, managing director and found partner, Orion Capital Managers
