When perception becomes more important than price

Posted by Morgan on 12th Sep 2012

We are in funny old times in the Commercial Property Market. Conventional wisdom dictates that any active investor is a buyer at the right price. Rational economic theory says that if an investment will yield an acceptable return for the risk assumed then an investor should be willing to buy it. In my economic text book there was a neat X shaped line graph that showed where price would be.

One problem with this and that is the word "Rational."

Today buyers of commercial property are not satisfied with a ‘good deal’ they want a ‘steal’ or in the words of my American friends they want to see ‘blood on the streets’. Many investors are no longer happy to simply think they are buying well they want to smell the distress, to know that the counterparty is going bust or that a bank is taking a huge loss from the sale. It is about the perception that there is pain rather than the confidence you are paying an acceptable price.

Why is this a problem? Europe is bust, real estate sucks and very few people have confidence the market will strengthen anytime soon. Surely the stench of distress should be overwhelming. Again in theory and in equity raising pitch books this is true but in reality it’s just not that smelly out there.

Real interest rates are low, banks are not forcing property into a weak market and there is very little compulsion on anyone to sell. Simultaneously, the weight of equity seeking to invest in the market is steadily growing and very little is being committed. Back to my economics text book - demand and supply. Limited supply and solid demand does not lead to prices falling.

There have been very few transactions close this summer but those that have closed have generally happened at prices that look ‘full’ compared to the pessimistic market sentiment. Herein lies the quandary. It is hard to invest in a thin market with few motivated sellers where very few buyers have a positive outlook but occasionally you will find an opportunity. If that opportunity meets your return criteria and you have confidence it is a good investment you then need the courage of your convictions. Wanting to see pain, distress and blood is either vanity or a lack of confidence in your own view and analysis – it has no place in rational investment. That said, it may well be the dominant investment theme for the end of 2012.

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