Low CRE Global Market Liquidities Are Likely a Result of Loss Aversion
Up to half of London and Hong Kong investment properties are probably worth less than their last buying price.
About a year ago, GlobeSt.com found that experts saw the coming of 2023 in the U.S. with uncertainty, which led to falling transactions and resulting obscurity of pricing. The result was large bid-ask gaps and plenty of unrealistic expectations on the parts of many.
Extend that outward to the globe and it sounds like what markets are seeing today, according to a new study from MSCI, written by Tom Leahy, executive director of MSCI Research, which looks at loss aversion on the part of owners and property-market liquidity. There is still a big bid-ask price gap in some of the largest office markets.
Put more plainly, the report says that up to half of investment properties in both London and Hong Kong may be worth less than their most recent purchase prices.
“Investors do not like to crystallize losses, and loss aversion is an observed phenomenon in commercial-property markets,” Leahy wrote. “Broadly, owners tend to sell winners, but hold onto losers, as they are less willing to take a loss on a prior investment. This fact becomes more important when aggregate property prices start to correct, and the tendency toward loss aversion has important implications for market liquidity. It can provide some explanation for both the current illiquidity in global markets in general and the variation in that illiquidity city by city.”
In other words, owners want to take profits from their best prospects and often hold the poorer ones because they don’t want to book a loss on their balance sheets. That would explain why much of the market losses in CRE can get hidden with no way to mark the hidden assets to market.
“The rapid rise in interest rates since the first half of 2022 has led to a sharp drop in transaction volumes and an ongoing correction in valuation and pricing metrics across many of the world’s largest property markets,” Leahy wrote. “By analyzing price movements to June 2023 using the RCA CPPI, and combining the price changes with the hold period for properties, we can quantify what percentage of buildings may be worth less than the owner originally paid through a mark-to-market exercise.”
London and Hong Kong turned out to be the markets in the worst shape, with estimated shares of assets worth less than their previous sale price of at least 50%. Comparing some U.S. markets, Washington, D.C. was under 30%; New York under 25%; San Francisco sat at about 20%; Chicago about 17% or 18%; Boston close to 15%; and Los Angeles about 12% to 13%. But with such percentages showing properties underwater, U.S. metros have nothing to feel safe about.