‘Echo bubble’ threat for real estate

Yield-driven investors are cautioned against ignoring the asset class’ weak fundamentals, amid rising concern ‘another pricing bubble is building’.

Yield-driven property investors are in danger of creating another pricing bubble by ignoring the weak fundamentals of many global property markets.

LaSalle Investment Management cautioned against the desperate search for wider spreads at a time when many real estate markets and sectors were still “reeling” from the fallout of the credit crisis and had yet to see signs of improvement.

The possibility of another pricing bubble is building as yield-driven investors comb the asset markets in search of wider spreads.

Jacques Gordon, LaSalle Investment Management, global head of research,

The firm’s global head of research, Jacques Gordon, told clients in its annual investment strategy capital markets were “anticipating economic growth well ahead of any line-of-sight recovery in rental income”. Such a sentiment was fuelling investor interest in prime properties, not least iconic buildings around the world – even though it was “well ahead of any improvement in the leasing markets”.

“The possibility of another pricing bubble is building as yield-driven investors comb the asset markets in search of wider spreads,” said Gordon. “We caution all investors against yield-driven investing in property that ignores the weak fundamentals that prevail in many markets today.”

Starwood Capital chief executive officer Barry Sternlicht recently warned a real estate liquidity bubble was forming as a cadre of “capital tourists” were eyeing public and private property markets for yield. “The markets are reequitising. There's a liquidity bubble forming … The credit markets are healing … they are over-heating,” Sternlicht said in December.

Gordon added that in Greater China, South Korea and the UK, private equity prices had risen by between 10 percent and 20 percent in the past year, with continued appreciation expected in 2010. Meanwhile, private equity values in Australia, Canada, France and Germany had stabilised at up to 30 percent below pre-crisis levels.

Boom markets such as Dubai, Dublin and Las Vegas were “still searching for a floor”, and landlords in the world’s three biggest office markets – London, New York City and Tokyo – were “still reeling from the blows taken by the financial services sector”.

Gordon said: “Is property in danger of an echo bubble? The current restrictive lending environment for real estate debt insures against another property pricing bubble, for now.” But Gordon warned when the likes of Greater China, the least restrictive debt market globally, had announced its intention to tighten lending to prevent a pricing bubble, investors should act cautiously.