COMMENT: Property is still delivering for investors - but for how long?

RICS’ latest market sentiment survey reveals a gap between property markets approaching the end of the cycle, and others in the early phase of an upswing. RICS chief economist Simon Rubinsohn reads between the lines and signals the risks ahead.

It may not yet be the time to raise the red flag over the real estate sector but with yields in key segments of the market at or near historic lows and deal activity soaring, it is not entirely surprising that the issue is very much in the mind of investors. This is also borne out in the results from our own quarterly sentiment survey (the RICS Global Commercial Property Monitor - GPCM) which regularly gathers market intelligence from some 1,300 professionals around the world.

As an example, around two-thirds of US respondents in the latest report indicate that the market could currently be described as being ‘expensive’ or ‘very expensive’. This may not be a surprise given what we know about the recent performance of real estate in key North American cities; indeed, our results for New York are even more skewed in that direction. However, the US is by no means an isolated occurrence. In Germany, a broadly comparable percentage of contributors take a similar view as is also the case in Switzerland, Hong Kong and Japan.

Of course, for every market that looks fairly fully valued there are others offering rather more opportunity and despite the recovery seen to date, many of these lie in Europe. More than two-fifths of respondents continue to describe the Spanish real estate market as ‘cheap’ or ‘very cheap’ with the results for Italy and Portugal pretty much mirroring its near neighbour; in each of these cases, a relatively high proportion of contributors view their local market as being still at the early phase of an upswing.

US and Germany
That is not, of course, the general perception in the US or Germany for that matter. In the former, around one-quarter of respondents now see the market being late cycle with a half viewing it as mid-cycle. Meanwhile in the latter, our feedback is even more striking with more than 40% indicating they believe the market is now in a late phase of the cycle. Which brings me to the question of how much more the richer property markets around the world can be expected to deliver for investors.

For what it is worth, we are being told in other parts of the GCPM that there is every reason to expect real estate, particularly in prime locations, to continue delivering healthy price gains over the next two or three years. Just returning to the North East coast of the US for a moment, the expectations of contributors from New York point to capital values increasing by a further 20% over the next three years.

And pretty similar projections are visible in responses from contributors in many other parts of the world.
Whether RICS members continue to stick with such a sanguine view will in part depend on how a number of the well documented risks, including the interest rate story, unfold over the coming year. Critically, on the latter, one doesn’t have to buy in fully to the ‘secular stagnation’ position of economist Larry Summers to recognise the significant headwinds even those economies leading the economic recovery continue to face. Indeed, the somewhat surprising outcome to the latest meeting of the US Federal Reserve (particularly the tone of the commentary) demonstrates that policymakers are clearly a long way from feeling comfortable about the sustainability of the economic expansion.

Given this, and the repeated comments from key central bankers that the unwinding of the current extreme policy stance (when it gets going) will be very gradual, I find it hard not to believe that the risks on the interest rate profile going forward remain biased to the downside. And whether it is global factors weighing on decision-making or jittery financial markets, the ‘lower for even longer’ message is something that I suspect will continue to underpin the cautiously positive message we are still receiving from respondents to the GCPM.

Simon Rubinsohn is chief economist at RICS