Market Risks Remains Higher15 July 2020
CMA’s Market Risk Assessment has remained higher for Q3 as expectations of softening rents and yields continue to set expectations of declining asset values.
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 latest quarterly survey, the perceived market risk remained stable at 6.8 out of 10, indicating that the risks of values declining were no different to those evident last quarter.
The largest change this quarter was the decline in risk International Risks, down 1.6 points, as survey respondents felt that Australia was better positioned to attract and retain investment capital compared to other parts of the world. The decline in this measure suggests that values may not be at risk of falling as much as they would if other international markets were performing better.
Survey respondents expect that whilst Australia may pull through the crisis relatively well, Access to Capital, ie via equity raising or debt funding, is slightly better than over the past quarter and as such, it represents a lower risk to declining values. The evidence from the AREITs debt and equity raising suggests that there has been capital available in the market to support real estate.
The risks from Market Sentiment increased marginally (0.16 points) during the quarter, partly reflecting the ongoing sluggish view of the housing markets from late 2019, exacerbated by COVID19 impacts.
Survey respondents also felt that Relative Pricing presented a slightly higher risk this quarter, up 0.4 points. 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. This measure widened over the last few quarters, predominantly reflecting the drop in 10 year bonds, leaving respondents feeling that the risks in the property sector are on the higher side of the traditional spread of pricing.
The survey also asked respondents to rank items likely to have the greatest negative impact on real estate pricing in years to come. The results in order were;
- Changing workplace arrangements (ie working from a non central location)
- Changing rates of unemployment
- Changing ways to buy / sell products & services
- Changing population growth
- Change in local / global equity markets
- Changing tax arrangements
- Changing living arrangements
- Changing interest rates
- Change of Government
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.