Window may be closing for property listings

07-06-2004

It seems as if the window of opportunity for listing directly-held, non-residential property is closing fast. The reason for this is that unlisted properties' market rating relative to listed property could further improve in months to come, and this will take some of the attraction of listing away.

Since late 2002, income yields of listed properties have dipped below the capitalization rates of unlisted property, which implies that PUTs have traded at a premium relative to directly-held property from that date, if measured against the listed-equivalent yield of correctly-valued, directly-held property. This, together with the lower cost of borrowed funds, facilitated large-scale buying of directly-held properties by listed funds.

However, the widening spread between the yields of listed and unlisted properties seems to have been arrested. To be sure, in quarter 2004:1, the listed-equivalent yield of directly-held property was still on its downward (strengthening) path, but listed-properties' income yields increased (weakened) slightly.

Rode expects that the declining or strengthening trend in capitalization rates will continue, driven by a persistent hunger for unlisted property from listed property funds and syndicators, as well as a further general increase in the demand for non-residential space. The latter factor improves the performance prospects for property.

However, as far as listed property is concerned, it seems that income yields have reached their lower turning point. This is based on the assumption that long bonds are fully priced. Thus, listed funds' income yields ticked up in the last quarter, probably because of the recent increase in long-bond yields, which PUTs have been closely tracking since 1998.