Back to the grindstone

In many ways, little has changed in the Norwegian property market over the past year. Activity in the transaction market is being sustained at the same high level, yields are largely stable, and rents in Oslo have maintained their indefatigable rise. We are talking about digitalisation, the environment, flexible offices and e-commerce, but were doing that last year as well.

But one aspect in particular looks different today. While both short- and long-term interest rates were rising as recently as last October, the long-term ones have since declined considerably. And although the interbank rate has risen, it is likely to peak below the level many expected. Expectations for future short- and long-term rates have fallen substantially. “Japanification” is suddenly on “everybody’s” lips.

As we have noted earlier, no one-to-one relationship exists between interest rates and yields. Our expectation last year was that property yields would rise less than interest rates, but that some upward pressure on the former was nevertheless likely. The parameters have now changed.

It is not only getting cheaper to borrow money, but also even more difficult than before to achieve a return from investing in bonds. The overall volume of fixed-interest securities with a negative yield has doubled in the space of a year and totals about USD 16 trillion globally. These investments guarantee a negative nominal return if held to maturity – risk without a return, if you like.

According to Preqin, international funds with a mandate to invest in property held USD 333 billion in dry powder at 30 June. That level was record-high, and Blackstone recently established the biggest-ever property fund when it raised USD 20 billion in equity.

Competition over properties is strong in many countries, and fund managers are struggling to put their cash to work. Increased macro uncertainty, record-low direct returns and slowing rent growth in many places do not make the job easier. In a number of cases, reaching the target returns communicated to investors when raising money is difficult.

We believe lower returns from property investment must be accepted in the future. But with negative interest rates across ever larger parts of the bond universe and a volatile share market with high multiples, it is by no means certain that the alternatives are more tempting.