CMA's Market Risk Assessment has shifted 70bps higher in Q2 as a result of the impacts from COVID 19.
The group measures 18 different market risk indicators in the housing and institutional real estate markets that deal with Access to Capital, Market Sentiment, International Risks and Relative Pricing.
In its first Quarterly survey update since the COVID19 pandemic, the perceived market risk edged 70bps higher to a score of 6.8 out of 10, indicating that the risks of values declining were materially higher than in the past quarter.
Each of the major indicators showed an increase in risk, except for International risks, where survey respondents and market data suggested that the International Risks favoured investment conditions in Australia, thereby mitigating the risk of declining asset values.
Whilst international investors may have adjusted their immediate investment program, COVID19 is affecting global markets and Australia is expected to remain an attractive investment destination for global capital with less capital repatriation expected than would have occurred if Australia faced this alone.
Survey respondents expect that whilst Australia may pull through the crisis relatively well, Access to Capital, ie via equity raising or debt funding, is more difficult than over the past quarter and as such, it represents a greater risk to declining values. Equity investors and debt providers have increased their scrutiny on rental incomes, tenant profiles and valuations.
There is already strong evidence that equity raising at discounted values is possible as the market saw this week with Charter Hall Retail REIT raising $300m at a 30% discount to the Dec 2019 NTA.
The risks from Market Sentiment also increased marginally during the quarter, partly reflecting the ongoing sluggish view of the housing markets from late 2019 but also reflecting that the reality that COVID19 had shifted the minds of investors in the market already. In other words, COVID19 has already established a sentiment that is unlikely to get much worse, though we are yet to see that sentiment fully play out in the market.
Survey respondents did however feel that Relative Pricing presented a much higher risk this quarter. The increase in this measure was the greatest contributor to the overall increase in Market Risk. The key Relative Pricing measure respondents were asked to consider, was the movement in the spread between prime asset yields and the 10 year bond yield. Whilst the spread has widened over the last few quarters, predominantly reflecting the drop in 10 year bonds, respondents felt that the spread is likely to widen further as investors price-in higher risks from the property sector.
CMA and its associates use the Market Risk Assessment Score as part of its systematic approach to investment recommendations, a process which considers returns for specific investment strategies against the underlying market and specific asset risks.
The risks reflected in this quarterly result will lead to investment options requiring a higher return to compensate for the higher risks.
Related Articles
