Having read some interesting articles which seem to be backed up with some interesting facts – it seems the ‘seeds of the next property cycle are germinating’.
The most interesting fact to arise from the studies is that for the typical institutional property portfolio, values are back at where they were in September 1999. The value would have risen to almost 2.25 times its September 1999 value by December 2007 before crashing back over the past two years. In other words, if it had been possible to invest €1,000 in a typical fund, that €1,000 would have readched a value of €2,250 in 2007 but would be back to being worth €1,000 today. The second interesting fact is that if €1,000 had been invested at the height of the boom in September 2007, it would be worth only €447 today. (all these figures are without any gearing/borrowing)
So, its pretty easy to realise, with hindsight of course, how many people and the banks of course have a problem. They would have bought and borrowed exactly when the bubble was starting and very few would have got out before that bubble burst in 2008!Alot of the buying was done between 2003 and 2006.
The third very important message from the SCS/IPD figure is that what is bad for capital values is good for the income of acquiring investors. The figures show that income yields fell from just over 6.5% in Sept.1998 to 3.8% in 2007 but now they are back to about 7% and still rising! This is due to the fact that as yield compression reverses and values fall, then income yield increases.
The first property bubble was up to 1990, the second up until 2001 and our current one ended – peaked in Sept. 2007.
One might ask – if property bubbles are clearly a cycle – then can we not predict when we might get out of this current recession? the answer being ‘yes’ if we fully understand how the cycle works, that is. In a recession rental levels fall to the point that the market then accepts the new ‘norm’. Then yields rise to levels that are also accepted as the new ‘norm’. This norm is set against yields from other forsm of investment such as shares, bonds, depsosits etc,. As values and rents fall, then new development becomes uneconomical because the cost of new development is more than the value of the finished buildings. This chokes off the new supply of buildings. So, at this point the fall in values generally bottoms out. Then the property market moves along the bottome while the economy gradually absorbs the oversupply of built space. These adjustments have already been happening in Ireland for the past 2yrs. As far as I can see values are almost at the bottom already. The fall in rentals has slowed down also. So I believe that the seeds of the next property cycle are sown and will start to germinate as the remanants of the last cycle has been swept away.
Ciprian Popescu on Friday, March 19, 2010 in Blog