Real estate is an illiquid asset class. It can take many months to execute a property trade versus the milliseconds it takes to trade listed instruments. But some real estate markets are demonstrably more liquid than others.
Traditional measures of listed market liquidity like time to trade or tradeable stock cannot be replicated in private markets. However, MSCI’s Capital Liquidity Scores turn the issue of property market liquidity into one of probability.
The scores use a set of market-level measures from the MSCI Real Capital Analytics transaction database for the largest real estate markets globally and combine them to create a probabilistic way of assessing market liquidity. Using probability as a proxy for liquidity, the greater the depth and breadth of capital in a market, the higher the probability of achieving favorable pricing on exit when selling an asset.
In Q4 2023, liquidity was down in 135 of 155 markets versus the same period 12 months ago, as shown in a diffusion index, and the global average score was down by more than 20 percent. This reflects how capital markets have reacted to the rapid shift to a higher interest rate environment. A fall of this magnitude is comparable with the drop in market liquidity in 2008-09 during the global financial crisis.
Within these headline numbers a myriad of individual city stories emerge. One is how certain cities have shown a greater propensity to lose liquidity very quickly during periods of uncertainty, whereas others show an ability to maintain liquidity during these same periods.
For example, San Francisco ranks as the eighth most volatile market covered by the MSCI Capital Liquidity Scores. Market liquidity drained away very quickly at the onset of the GFC and the same dynamic played out in 2023. This should have a long-term impact on pricing, with buyers demanding a greater liquidity premium in comparison with other, less volatile markets. Certainly, the substantial price correction in San Francisco in the past 18 months shows the sharp fall in liquidity, as buyers reassessed the outlook for the market, has had an effect.
Conversely, a city like Tokyo shows relatively little annual variance in liquidity levels. The score for Tokyo’s five wards is the least volatile of all markets covered, and the area finished 2023 as the most liquid property market in the world. This shows how the Japanese market has continued to attract capital, with the Bank of Japan remaining comparatively dovish throughout the current monetary tightening cycle in comparison with most developed economies.
Speed of recovery
Historical analysis of the scores also shows the variation in the length of time it took for liquidity to return to markets as they recovered from the shock of the GFC and, in Europe, the eurozone debt crisis. For example, in Central London the peak-trough-peak took just over five years, whereas in Berlin it took more than nine years for liquidity to return to pre-crisis levels. This clearly demonstrates that some cities have been able to bounce back faster from these periods of stress than others.
Just as Central London rebounded strongly from the GFC, it may also be a bellwether for a wider recovery in the property market in 2024. The Q4 update of the Capital Liquidity Scores shows that Central London liquidity may have bottomed out in Q3 – a small increase in Q4 could be a sign of things to come.
If you do not receive this within five minutes, please try to sign in again. If the problem persists, please email: 
