Why second is best

Skilful timing of investment in secondary property could provide returns “that will make people’s careers”, said Dr. Nick Axford, senior managing director and head of research at CB Richard Ellis Hong Kong in his MIPIM Asia presentation. Real Estate Investment In Our Uncertain World: Global Overview And Local Sentiment.

Ashford said that the real-estate investment market is in many ways behaving contrary to what might be expected given the underlying indicators and the outlook for Europe in particular.

What has been really surprising is the speed with which the yields index has turned around. Axford observed, pointing to the extraordinary decline in yields in the last 18 months to two years. In the case of Asia, office capital values have started to move up 10%-12% per year, although the turnover of property has not been rising as fast as values.

“The key is the huge weight of money trying to get into the real estate market or particular bits of the real estate market,” Asford said, adding that it is the bond-like investment characteristics of better quality properties to better qualify tenants that are behind the trend. “Length and quality of income stream are paramount,” he said.

Axford explained that investors are looking for well-located large liquid markets, because funds are risk averse but want a hugher return than they can achieve in the bond market.

“A good, well-let investment in real estate in a good location has significant advantages,” he said. “The yield is in most cases significantly higher than those of equivalent government bonds. And if the tenant does default, you have still got a building—a physical asset—unlike a bond.” He added that, in many cases, rents also rise with inflation.

But most of these qualities only apply to better quality properties. At the moment, the last thing investors want to do is sell better quality properties—and it is this that is pushing yields back down again.

But Axford pointed out that this only applies to top-quality investments.

The spread between prime and secondary yields is, we think, at the highest it has been in the last 30 to 40 years and, possibly, the highest ever seen in terms of the mainstream commercial property markets because investors are very risk averse.”

But this could change. “For investors who time the market right, there is the opportunity to make returns that will make people’s careers. There are exceptional opportunities, not only to reposition property from secondary to prime, but to benefit from the yield decompression that will come when investors believe that recovery really is on the way.”

According to Axford, it is the current lack of belief in the recovery that is holding things back. “Once that belief starts to come back, we will see a very sharp change in the way that secondary value investments are beings priced,” he said.

“That’s where the money is. At that point, there will be some fantastic returns to be made.”

This article appeared in the MIPIM Asia Review 2010. Read more here.

Top image credit : Photobank gallery

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