Global Property Prices Haven’t Declined in Line with Assumptions
Real Capital Analytics’ CPPI Global Composite Index rose 3.1% in 2020, down from a 5.0% pace of growth posted at the end of 2019. RCA says the moderation in the rate of growth can be attributed to the fallout from the COVID-19 pandemic.
In its fourth-quarter 2020 Global Cities report, RCA points out, “This modest pace of growth raises a question, however: why have prices not plummeted? In asking that question, investors and market analysts have baked in an assumption that prices are simply bound to fall.”
This assumption is based on past performance, i.e. “prices fell sharply in the last recession so with the economy down again, the market will see the same pain. Price growth and recessions do not always work this way.”
While acknowledging that “economic conditions are not rosy” globally, RCA says commercial property prices shouldn’t react to these declines in the same way they did to the economic declines in the previous decade. “Expectations are part of the price discovery process,” says RCA’s report. “Investors underwrite deals based not just on current financing possibilities and income in place, but also forecasts of income. Potential buyers will underwrite using forecasts of limited income growth out of a sense of caution, but current owners will look past the pandemic to rosier times in the future.”
However, RCA says, “This underwriting disconnect impacts not pricing, but deal volume: global investment activity across income-producing property types fell by more than a quarter in 2020.” Price growth for the year was weakest in Asia Pacific, with no change from a year earlier. However, flat annual growth is actually an improvement compared to earlier in 2020, “when the combination of lingering price declines in Hong Kong plus an early downturn due to COVID-19 caused year-over-year price drops from Q1’20 through Q3’20.”
The EMEA region slipped the most in 2020, with price growth down to a 3.6% pace by year-end versus the 8.4% annual pace set in 2019. The largest market in the region, Central London, posted a decline of 2.3% from a year earlier. RCA observes, “Central London did at least outpace its global peer Manhattan, which posted a 10.9% annual decline.”
An outlier among global markets is Manhattan’s smaller neighbor farther up the East Coast: Boston pricing was up 14.4% from a year earlier with volume up only 5% for the year. “With uncertainty across much of the global economy, capital sources are pursuing investments in the technology sector across all asset classes: public equities, corporate debt, even commercial real estate,” says RCA. “Boston is a hub of technology activity and investors are chasing this opportunity set in New England.”
For comments, questions or concerns, please contact Paul Bubny
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