There was a lot to learn from international property professionals. Some of the lessons about the European market that we took away with us were:
Yields are being driven by occupation rates, rather than cheap money.
We think the trend is similar here, and it’s not just yields being compressed by occupation rates (or very low vacancy rates – to put it another way ) but prices are also being driven skyward by a combination of replacement cost (or increasing build costs) and lack of stock availability.
In some prime European markets where yields are 3.0 to 3.5 %, the cost of money can be as little as 1.0 to 1.5%. If prime yields in New Zealand are 5.0 to 5.5 %, and our cost of borrowing is 4.5 to 5.0%, what conclusion do we draw regarding our market?
Numerous times we heard the refrain “risk is looming”. Some of this is simply based on historical evidence, and the point that we have reached in the current cycle – as in “what goes up must come down” . But other times the advisory was tempered by the view that there is a risk, but we don’t know what it is, and it will probably be something totally out of left field. And one of the most specific risks identified was liquidity. Whilst there is ample liquidity currently, if something were to occur which impacted liquidity, that could sharply impact the market.