Page one or two of your real estate text book probably states something like: the two prime drivers of property values are:
1) rent (rental income, rental value)
2) yield (cap rate, NIY)
What we have seen in real estate markets so far, is a global repricing due to a yield shift. After years of ongoing yield compression, additional risk perception by property investors and financiers came into the equation. This implied risk premium quickly shifted yields up (values down), leading to the substantial repricing in real estate we have seen over the past year or so.
Now that we are well into our recessions worldwide, it is likely that the other main driver of property values – rental value- may be affected too. The occupier market is badly affected accross the board: office, retail, logistics, leisure, anything. Take-up has fallen dramatically. Vacancy rates are boosting at an unanticipated pace. In other words: the occupier market is tilting in one direction, leading to: lower ERVs. And when expected rental values are dropping, so will the assets values be.
It is difficult to predict, because the speed of adjustment will differ among sectors and countries, but it is likely that property market will encounter a second hit. After being hit by repricing due to a dramatic yield shift, real estate values will suffer once it becomes clear that rental values are under pressure.
Recommended reading: CBRE’s Global Market View (May 2009)