More than 50% of investment properties in London could be valued at less than they were bought for, fuelling the “loss aversion” among potential sellers, which is a key cause of the market’s current low deal volume.
Research from MSCI analysed price movements to June 2023 and combined this with the hold period for properties. London and Hong Kong emerged as the “worst-placed” of the global cities analysed on the measure, with more than 50% of assets estimated to be worth less than their last acquisition price.
In London, the rapid rise in interest rates has driven commercial property prices down to levels last seen in 2017, with a large amount of stock bought by investors since then. This is in contrast to markets such Sydney, Seoul and Melbourne, which look better placed because of the high rate of price growth through the cycle and a very modest correction so far.
Tom Leahy, executive director, MSCI Research, said: “Investors do not like to crystallise losses, and loss aversion is an observed phenomenon in commercial property markets. Broadly, owners tend to sell winners but hold on to losers, as they are less willing to take a loss on a prior investment.
“This fact becomes more important when aggregate property prices start to correct, and the tendency toward loss aversion has important implications for market liquidity. It can provide some explanation for both the current illiquidity in global markets in general and the variation in that illiquidity city by city.”
To find out how badly deals activity is being affected by loss aversion, MSCI combined the data showing what percentage of properties is estimated to be in the red in each city with MSCI capital liquidity scores. Broadly, it found that where more properties are estimated to be out of the money, the less liquid the transaction market. London’s capital liquidity score is down by more than 20% versus the 2015 peak – down by 15% in the past 12 months alone. Meanwhile, fewer assets are estimated to be in the red in Sydney, Melbourne and Boston, and deals activity has held up better in those cities.
“Of the office properties sold in central London this year, and where we have a valid prior price, only six of the 21 trades were at a cash loss. This emphasises how the trading activity taking place is oriented toward the better-quality assets, with owners potentially unwilling to take a loss by selling lower-quality buildings,” Leahy said.
MSCI analysis also shows that London, along with German A-cities and San Francisco, has the largest gap between the amount buyers are willing to pay for a building and the price at which sellers are willing to trade. “Sellers anchor on prior prices, and so liquidity dries up when buyers shift their price expectations more rapidly during periods of uncertainty,” Leahy said.
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