16/04/2015 - 14:51

Is there a message in property sales?

16/04/2015 - 14:51

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It’s not easy finding a connection between a big Australian cattle company, an American business that makes jet engines, and the Western Australian government’s insurance arm, but if you look closely they’re all doing something at the same time – selling property.

Is there a message in property sales?
Westralia Plaza is one of three CBD office towers ICWA is selling.

It’s not easy finding a connection between a big Australian cattle company, an American business that makes jet engines, and the Western Australian government’s insurance arm, but if you look closely they’re all doing something at the same time – selling property.

S Kidman & Co, the Adelaide based family business that owns 11 cattle stations and runs 200,000 head of cattle across four states, is offering all of its properties for sale.

General Electric, which seems to have a finger in everything from jet engines to medical devices, has decided that it’s time to offload most of its $39 billion worldwide property portfolio.

The Insurance Commission of Western Australia (ICWA) hopes to raise $800 million by selling three central Perth office buildings and two shopping centres.

At first glance there is nothing new about anyone selling property; it happens every day.

However a report from high-powered research organisation MSCI last night threw fresh light on the three planned property exits by Kidman, GE and ICWA.

According to MSCI (which once stood for Morgan Stanley Capital International), the global property bubble is now bigger than the one just before the 2008 financial market crash.

Linking the MSCI report with the Kidman, GE and ICWA property deals is not difficult, even though the process produces a result that other property investors might not like to here.

But what the three sellers appear to be doing is getting out while the getting is good, not that they would say that because it could jeopardise a deal.

Potential buyers, unless they are blinded by a mistaken belief that property values never fall, should be aware of what MSCI says, and how that view is being driven by the market-distorting effect of super-low interest rates and the worldwide hunt for investment yield.

According to MSCI, property investment worldwide last year returned a very respectable average of 9.9 per cent, a number that stands out like the proverbial outhouse in a desert of bank interest at 2 per cent in Australia and 0 per cent in Europe.

The problem with that 9.9 per cent return is that most of it came in the form of capital value appreciation, and while it was the best performance for property since 2007, it was at the cost of a plunging yield from rental income as a proportion of property value.

In other words the yield, which is essentially the rent paid by tenants, was falling during 2014 as a proportion of the property’s value.

Put another way, as property values rise, yields fall.

MSCI is worried that the trend cannot continue because the “pricing of real estate” around the world has been increasingly aggressive as investors run out of choices with bank interest, low government and corporate bonds, and stock markets are fully priced.

Research managing director at MSCI, Peter Hobbs, told London’s Financial Times newspaper last night that there is concern over the sustainability of high property prices.

“Most global markets are at or close to historic low yield levels,” Mr Hobbs said.

“The main factor behind pricing is exceptionally low bond yields, which make property much more appealing to investors is relative terms.”

If there is a worldwide property bubble, and some people argue that there is not, then it seems likely that the bubble will expand further before it contracts, or pops.

The reason for an expected increase in property prices despite their being at a pre-2008 crash level, is that Europe has just started its round of money printing, or quantitative easing, as the US winds down its QE program.

With the world already awash in government-created money, the prospect of Europe dropping billions more euros into the market is unnerving.

“QE is sucking in real estate capital because debt finance is so cheap,” Mr Hobbs said.

“If the US keeps doing what it has been doing for the past five years and Europe catches up, then we are set for another strong year in 2015.”

But as the game of chasing yield pushes property prices higher, it also means that late entrants into the property investment game are forced into lower-grade properties with their higher risks.

It’s going too far to say that the Kidman family, GE and ICWA are all acting because they’re concerned about what happens when a property bubble bursts; but it’s equally likely that they will have much less property exposure if/when the bubble does burst.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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