The false message of "THE" conference

What about further yields? Is everything all right (or will it be)?

First and foremost, I wish to make it clear that I attended quite a few conferences and meetings about property market during many years but the only useful and beneficial event of the conference business for me was the portfolio conference. The property conferences titled as “property investment forum” organised professionally by portfolio.hu in November were remarkably useful events for the trade (if I am not mistaken, the third one was held lastly). During such events the audience can get a lot of interesting and useful information – the only thing sometimes you have to do is read between the lines.

I carried out a public-opinion poll and came to the conclusion (the one expected by me...) that the participants I questioned think the key message of the conference was that 7-8% yield is expected on the market for the next year.

After the event, an article was published on portfolio.hu, titled as:

Decreasing yields are expected on the market for 2011

(By the way, I must mention that something can decrease only if it is at a certain level; “nothing” cannot be decreased – as there are in fact not any public transactions so we do not know anything about the average transaction level; consequently, it cannot decrease.)

Where is the false message?

Therefore, let us try to decode everything we have heard.

The conference carried out an opinions survey by making the participants vote. This survey brought the result that 47% thinks that 7-7.5% yield levels on premium office buildings will have been produced by the end of 2011, and 34% thinks that yield levels will have been around 7.5-8%. Consequently, according to 81%, such levels will have been between 7 and 8% by the end of next year.

The opinion having been formed is a hope, a desire and not a fundamentally reasoned valuation. The opinion indexes comprise not the data about market happenings but what the property experts taking part in the survey think of the market. Therefore, such indexes do not usually give precise and suitable forecasts. They are not worth focusing on and drawing conclusions from (I usually oppose indexes).

On the other hand, RICS President (!!!) Robert Peto also attended the event and gave a lecture. I wish to highlight one thing in his lecture:

The “Red Book” containing the RICS standards was first published in 1973. The edition of that time has already included the concept of “Open Market Value” implying practically the price determination in property appraisal, i.e. the price which the given property can probably be sold at.

The international definition says: “The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after a proper marketing wherein the parties had each acted knowledgeably prudently and without compulsion.”

As a result of the present situation, property appraisers have to give special attention to this definition as, owing to the “negative- equity” situation, sellers and buyers do not agree with each other in the open market since buyers are willing to buy at prices which sellers cannot sell at (as only the banks have money tied up in properties at such pricing).

The new definition of “willing seller” takes on special significance:

“ . . . a willing seller . . .

     Is neither an over-eager nor a forced seller prepared to sell at any price, nor one prepared to hold out for a price not considered reasonable in the current market.

     The willing seller is motivated to sell the property at market terms for the best price attainable in the (open) market after proper marketing, whatever that price may be. The factual circumstances of the actual property owner are not a part of this consideration because the ‘willing seller’ is a hypothetical owner.”

So the question is not at which point a buyer and a seller agree on the price in the market but for how much the seller could sell the property if there were not any compelling forces (e.g.: indebtedness) on him/her. This drastic definition helps us understand what kind of values there will be in the future. Hence it is not our wishes/desires and the property owners’ position what matters but only for how much the buyers are actually willing to buy. I think it is also true if the owner is not willing to sell at the price which the buyer is willing to buy at.

To sum up:

Experts investigating and intending to understand future should make decisions based not on opinion indexes. Future should be investigated based on the factual data of the market, macro-processes and common sense reasons.

Relying upon these findings, there is only one factor that may produce low yields: the colossal liquidity formed in the developed markets of the world.

There are, however, some factors which have a counter effect on it:

1.  Inflation fears (I intentionally placed these factors first)

2.  Regional and national extra charges

3.  The necessity of replacing resources burned in the financial system (liquidity is appropriated to the replacement thereof and not to financing)

4.  Loss of the significance of the sector as the target area for investment

5.  The effect of simple macro-problems on the market (stagnating economy – vacancy risk)

6.  Cross flow counter effects (money came from Western Europe to this region so far because there had no place for reasonable priced investments – this process has just changed; they know what to spend money on their homeland)

Feel free to decide which way we tend.

Many of us seem to think that 6-8% yield should be produced on the Hungarian property market by God-given ancient right. I can only tell them that ten years is not a long period of time in property developers’ lives. Please be as kind as telling me how investments yields were calculated in Hungary ten years ago?