This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.
At the start of December, investment group Blackstone acquired six industrial properties in the Greater Toronto Area (GTA). The group paid an average of CAD$270 per square foot for the sites.
No two properties are the same but this was more than 40% higher than the rate at which industrial REITs in the Middlefield Canadian Income (MCT) portfolio have been valued.
That disparity may reflect the peculiar set of competing forces that are playing out in some property markets. Valuations have historically come under pressure as interest rates rise, which is likely the reason we’ve seen discounts widen so dramatically in the sector this year.
However, in both Canada and the UK, other factors seem likely to keep prices up, particularly in the residential market, and potentially benefit investors in rental properties. Both countries are suffering from a housing shortage. Given the political implications of building on ‘green’ sites or doing anything that would drive prices down, it’s probably unsurprising that policymakers have taken few meaningful steps to increase supply.
But supply may now also be hard to come by. The rising cost of labour and materials has put serious pressure on margins for housing developers. Of the 30,000 housing units that were supposed to be built in the GTA this year, for example, 10,000 have been cancelled or postponed – something which was probably helped along its way by a nearly 50% increase in local taxes.
Interest rates are likely to be at play here as well. With borrowing costs going up, it is becoming harder to buy. Indeed, UK homebuilding group Taylor Wimpey said last month that a quarter of buyers had pulled out of deals in the second half of the year.
With supply remaining low and fewer buyers, it seems more people are being driven to the rental market. In London, average rents have increased by almost 16% according to property website Rightmove. Things are even more extreme in Canada. According to Canadian rental website Rentals, the price of renting a two-bedroom property is up 20.7% in the GTA and 21.3% in Vancouver compared to December 2021.
Assuming rents do hold up, the more pressing question for residential property investors is what will happen to valuations. Lower buyer demand, which could easily become more pronounced if there are more interest rate hikes and the economy deteriorates further, could mean downward pressure on prices.
The Bank of England is cognizant of this. In November, two members of the Monetary Policy Committee dissented from the 75bps increase in the base rate. Governor Andrew Bailey was also explicit in saying the market had priced in too many interest rate hikes. The trouble here is that if the central bank is too dovish, it will come under pressure to do more to reduce inflation. But doing so could crash the housing market.
It seems unlikely that the competing forces of high demand, low supply and higher interest rates with lower demand are going to dissipate as we head into the new year. For prospective investors the question is whether discounts in the sector, many of which are in excess of 20%, are wide enough to cushion further valuation declines.
Past performance is not a reliable indicator of future results
Login to read the full article...
Kepler Trust Intelligence provides research and information for professional and private investors. In order to ensure that we provide you with the right kind of content, and to ensure that the content we provide is compliant, you need to tell us what type of investor you are.Continue