I was asked to take part in a judging panel recently: one of the categories was for deal of the year and one contender was a large modern logistic enabling facility (or shed as we used to call them) which sold at an eye-wateringly low yield. Some judges argued this should win as it had set a new benchmark for capital values in the area. I argued against it: while it was a great deal for the vendor (particularly given the timing), it had to be a real dog for the purchaser. A bit later I checked the MSCI numbers and noted that they were reporting a 25% fall in industrial capital values between the deal date and end-2002 driven by substantial yield increases. Oh well, perhaps our logistics facility bucked the trend and was special, “all properties are unique” after all.
Yet the overall yields around that time were hard to explain in terms of economic logic. If we think of the yield as the required return less the long-run expected rental growth then, given the bond yields really could only move in one direction, to make the returns that were being promised, rents would need to continue to rise strongly. The story was that there was an increasing demand for space and the pandemic had reinforced the need for more warehousing and logistics. Well, maybe.
“I teach my students that if they hear “new paradigm” they should liquidate and run for the hills.”
But that demand would need to be sustained and supply would need not to respond, even though development would look very profitable. For all the constraints, inertia and lag, supply responds (it’s just a shed, remember!). When I politely raised this, I was told that I didn’t understand the market, there was structural trends and “a new paradigm”. Echoes of 2006.
Well, I am a dinosaur, and these are times of extraordinary market and societal change, with innovation in working practices, production processes, financial markets, information and communications technology which, allied to the shocks that act as a catalyst and accelerate these trends, will transform the market. It’s just that we always seem to live in revolutionary, transformational times – which very often turn out to be much the same as before, at least in terms of market fundamentals.
