Nature of Property Cycles:
Past, Present and Future
Robin Goodchild MA PhD FRICSInternational Director, Global Research & Strategy and Visiting Professor, University of Aberdeen Business School
9th May 2017
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• The Past: pre-2014
• Nature of Cycles in the UK and other Markets
• Academic Literature
• The Present: 2014-Today
• What is the nature of the current cycle?
• Similarities and Differences
• The Future: The Next Decade
• Understanding the causes of cyclicality - lessons learned
• Can the Credit Cycle be tamed?
• Conclusions and Forecasts
Nature of Property Cycles : Past, Present and FutureAgenda
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The Past: (pre-2014)
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UK All Property Real Capital Value change % pa
Sources: LaSalle, MSCI
UK Property 1968-2013: Three Significant Cycles
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
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UK All Property Real Capital Value change % pa
Sources: LaSalle, MSCI,
UK Property 1968-2013: Three Significant Cycles
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
2004-091972-76
1987-92
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Annual Capital Value Change (local currencies)
Source: IPD (Australia, UK), NCREIF (US) Data through 2013
Developed Markets show similar cyclical pattern 1980-2016
-30%
-20%
-10%
0%
10%
20%
1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014
Australia
UK
US
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All Real Estate Markets are CyclicalReal Office Values in Major Global Markets
Sources: PMA, Wheaton & Barranski, Vallis, Devaney, Turvey, RICS, Bjorklund & Soderberg
0
100
200
300
400
500
600
19
76
= 1
00
in
fla
tio
n a
dju
ste
d
New York Frankfurt StockholmTokyo Sydney SingaporeLondon City
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All Real Estate Markets are CyclicalReal Office Values in Major Global Markets: Especially Volatile in Hong Kong!
Sources: PMA, Wheaton & Barranski, Vallis, Devaney, Turvey, RICS, Bjorklund & Soderberg
0
100
200
300
400
500
600
700
800
900
19
76
= 1
00
in
fla
tio
n a
dju
ste
d
New York Frankfurt StockholmHong Kong Tokyo SydneySingapore London City
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-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
-35.0 -30.0 -25.0 -20.0 -15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 20.0
Real Capital
Growth % pa
Real Rental
Growth % pa
Example from UK: Property Cycles 1968-2013
9
Sources: MSCI/IPD, LaSalle Investment Management
'Equilibrium’ 2011 –?
1995-2003
1979-86
Boom 2004-6
1987-8
1972-3
Bust 2007-9
1974-6
1990-2
Recovery 2010
1993-4
1977-8
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Real Capital Value change %
Sources: MSCI/IPD, LaSalle Investment Management
Decomposing UK Property CyclesA Comparison of Three Cycles
Real Rental Value change %
-50
-40
-30
-20
-10
0
10
20
30
Booms Recoveries
1970s Late 1980s GFC
Busts
-30
-20
-10
0
10
20
30
40
Booms
1970s Late 1980s GFC
Busts Recoveries
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What else does this tell us?
• 2008/09 was not exceptional in real estate terms (at least in the UK)
• 16-18 years between cycles – is that just a coincidence?
• Types of economic cycles:
– Kitchin: 3-5 years – inventories
– Juglar: 7-11 years – fixed investment (business cycle)
– Kuznets: 15-25 years – infrastructure investment
(18 year US property cycle - Foldvary 1997; 15-25 years in UK – Barras 2009)
– Kondratiev Waves: 45-60 years – technological changes / financial manias?
• Cracking Stories:
– Early 1970s – Plender, J (1982)
– Late 1980s – Ross Goobey, A (1992)
– GFC – ‘Big Short’ etc.(& World Economic Forum (2015))
The Present: 2014 - Today
UK All Property Real Capital Value change % pa
Sources: LaSalle, MSCI
UK Property 1968-2016: The PresentDid we experience a Boom in 2014/15 so are we now about to have a Bust?
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
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UK Property Transaction Volumes: The PresentThe Pattern of Transactions looks suspiciously like 2005/07
Value and Number of Commercial Property Deals in March of Each Year
Sources: Property Archive, Capital Economics
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Real Capital Value change %
Sources: MSCI/IPD, LaSalle Investment Management
Decomposing UK Property CyclesCapital Gain in 2014/15 not sufficient to be a ‘Boom’
Real Rental Value change %
0
5
10
15
20
25
30
35
Booms
1970s Late 1980s GFC 2014/15
-5
0
5
10
15
20
25
30
35
Booms
1970s Late 1980s GFC 2014/15
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Sources: Thomson Reuters (Datastream), CBRE, LaSalle Investment Management
UK Asset Class Yields 1975-2017 Q1Spread between Property & Gilts has never been wider
-2
0
2
4
6
8
10
12
14
16
-2
0
2
4
6
8
10
12
14
16
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017Q1
Yie
lds %
UK All Property Yield
10-year Gilt
FTSE Dividend Yield
Prime West End Office Yield
20-year index-linked Gilt
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0
2
4
6
8
10
12
14
16
1700 1720 1740 1760 1780 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
Inte
rest R
ate
%
Yield on Consols 1700-2015(undated Government bonds)
Sources: Bank of England, PMA
But the Post-War period is an Aberration relative to history What is a ‘normal level’ for the Risk Free Rate?
What drives Property Cycles
The Future
Sources: LaSalle, MSCI, ONS
UK Property Cycles 1968-2016: Three Significant OnesStrong relationship between Property Returns and Economic Growth
-10
-8
-6
-4
-2
0
2
4
6
8
10
-30
-20
-10
0
10
20
30
1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
Total UK Commercial Property Real Returns % pa GDP % pa (RHS)
-10
-8
-6
-4
-2
0
2
4
6
8
10
-30
-20
-10
0
10
20
30
1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
Total UK Commercial Property Real Returns % pa GDP % pa (RHS)
Sources: LaSalle, MSCI, ONS
Economic Downturns don’t have to cause a Property BustBig Cycles have occurred every second Economic Downturn
1974/5 1980/1 1990/2 2001/2 2008/9
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Too much office development can also be problematic UK Office development 1980-2016
Sources: LaSalle, BCIS, ONS
£1,000
£1,500
£2,000
£2,500
£3,000
£3,500
£4,000
£4,500
Feb-80 Feb-84 Feb-88 Feb-92 Feb-96 Feb-00 Feb-04 Feb-08 Feb-12 Feb-16
UK
Offic
e C
on
str
uction O
utp
ut:
Con
sta
nt 2
01
3 p
rice
s £
’ mill
ion
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UK Lending to Corporate Real EstateHighly correlated with the 3 Cyclical Peaks
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How the Building Cycle worksProperty Market Fundamentals Capital MarketsReal Economy
Recovery
Increasing property demand
Credit Expansion
Falling vacancy
Rising rents/Falling yields
Upswing in building starts
Speculative building boom Credit boom
Rising construction costs
Increasing supply and slackening demand Credit tightening
Prosperity
Recession
Rising vacancy
Falling rents/Rising yields
Downswing in building starts
Property slumpDepression Credit crunch
Accelerator +Multiplier +
Accelerator -Multiplier -
Source: Barras (2009) p 80
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-10
-8
-6
-4
-2
0
2
4
6
8
10
-30
-20
-10
0
10
20
30
1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
Total UK Commercial Property Real Returns % pa GDP % pa (RHS)
Sources: LaSalle, MSCI, ONS
Economic Downturns don’t have to cause a Property BustBig Cycles have occurred every second Economic Downturn
1974/5 1980/1 1990/2 2001/2 2008/9
But no accident that worst recessions usually coincide with the Busts
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Why is CRE lending so cyclical?Write-off rates on lending to UK businesses
0.00
0.50
1.00
1.50
2.00
2.50
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
% L
oss R
ate
s o
n L
oan
s
Private non-financial corporations Commercial real estate companies
Lending by UK monetary financial institutions. The series are calculated as annualised quarterly write-offs divided by the corresponding
loans outstanding at the end of the previous quarter. The data are presented as four-quarter moving averages and are non seasonally
adjusted. Lending in both sterling and foreign currency, expressed in sterling terms.
Source: Bank of England and Bank calculations
‘Time and again financial
earthquakes are thrown up by
excessive risk taking on borrowed
money in property. Indeed,
property seems to have a unique
capacity for inducing collective
memory loss among bankers.’
John Plender FT 02/05/2017
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Similar data for USA show GFC explosion in Loss RatioDelinquency Levels for US CMBS loans 2000-15
0
200
400
600
800
0
20
40
60
80
2000 2002 2004 2006 2008 2010 2012 2014
To
tal
Vo
lum
e B
illio
ns U
SD
Billio
ns U
SD
30 Days 60/90+ Days
Non Performing Beyond Maturity Foreclosure/REO
Total Loan Volume (right scale)
Source: Trepp LLC
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Some lessons from three big Property Cycles
• Debt driven real estate markets are dangerous
• Contradiction between prudent lending and building a market leading
banking business in commercial real estate
• Too much development is also dangerous
• ‘Greed and Fear’ rule - pay attention to Behavioural Economics
• Property looks a very easy business in a Boom
• Beware managers in senior positions who have not experienced
a Big Cycle
• If commercial property values increase by over 25% real (in a 2/3 year
period) - there is a very high probability of a Bust
• Ways to exploit property cycles
– ‘Catching the falling knife’ - buy in the Bust to exploit the Recovery
bounce
– Long term investing between big cycles selling into the next Boom
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Bank Lending to CRE as a % of all Lending
Sources: Bank of England, MSCI/IPD
UK Commercial Real Estate (CRE) Lending 1969-2016The current situation looks comfortable, i.e. mid-cycle
0
20
40
60
80
100
120
140
160
0
2
4
6
8
10
12
14
1969 1974 1979 1984 1989 1994 1999 2004 2009 2014
Real
Cap
ital
Valu
es I
nd
ex
(196
9 =
100)
% o
f B
an
k L
en
din
g t
o C
RE Bank Lending % All Property Real Capital Values
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Pros
16-18 years from 2007/8
Time for professionals without experience of
a Big Cycle to reach positions of seniority
Debt market is attracting new players who
may not have any institutional memory
Bank of England will not be sufficiently brave
to remove the punch bowl in time
(as in 1986/7 and 2005/6)
So: When will the next Big Cycle occur?circa 2025 or some other date
Cons
The 2008/09 crash was so devastating that its
effects will stay longer in corporate memories
Better information about real estate markets will
prevent a recurrence:
- Property Vision report recommendations:
‘Long term’ valuations
Loan data
Recovery from the GFC will be so muted that
there is not enough confidence to generate a
Boom (cf. recovery from 1930s)
Better education – CULS, IPF and SPR achieve
their mission
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Bank of England’s Investment Valuation Approach (Q2 2015)
Sources: Association of Real Estate Funds (AREF), Bloomberg, Investment Property Forum, MSCI and Bank of England calculations.
Investment valuations are based on assuming property is held for five years with the cash flows from the rent and sale discounted. It is assumed
that the property is sold at a rental yield (in line with long-run averages fifteen years). The sale proceeds and rental income are discounted by the
ten-year gilt yield plus a risk premium. The swathe represents varying assumptions on the average through the cycle risk premium, given the
inherent uncertainty in measuring it; the lower end of the range is from a survey of investors from AREF and the higher end is a risk premium
derived from the long-run relationship between gilt yields and property yields. For more details see Crosby et al. (2011),
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• The Past: pre-2014
• Property Cycles have a very long history
• Four market phases – Boom, Bust, Recovery & Equilibrium
• Key causes:
• Combination of Economic, Debt Availability, Excess Development
and ‘Memory’
• The Present: 2014-Today
• Strong Equity Driven upswing but not a Boom
• Market likely to remain in Equilibrium, i.e. no Bust
• The Future: The Next Decade
• A Big Cycle around 2025 is not inevitable but …..
Nature of Property Cycles : Past, Present and FutureConclusions and Forecasts
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Final Thoughts: Hope over Experience
Ross Goobey, A (1992)
“Whenever the [new cycle] starts, there will be new
participants, who will be less constrained by the
experience of this recession than those who lived
through it. They will repeat many of the mistakes of
the 1980s, as many of the companies repeated the
mistakes of the 1970s. The market will then be
driven to levels which will prove unsustainable.”
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Contact details: Robin Goodchild PhD FRICS
E-mail [email protected]
References:
Barras R (2009) ‘Building Cycles – Growth & Instability’ Wiley-Blackwell, West Sussex, UK
Benford, J & Burrows, J (2013) ‘Commercial property and financial stability’ Bank of England Quarterly Bulletin Q1 pp 48-53
Cosmetatos, P (2016) ‘Improving the effectiveness of CRE debt risk management’ , Chapter 21 in Petersen, A (Editor) (2016)
Commercial Mortgage Loans and CMBS: Developments in the European Market 3rd Edition, Sweet & Maxwell, London
Crosby, N and Hughes, C (2011), ‘The basis of valuations for secured commercial property lending in the UK’, Journal or European
Real Estate Research, Vol. 4, No. 3, pages 225–42.
Foldvary, F. (1997) "The Business Cycle: A Georgist-Austrian Synthesis." American Journal of Economics and Sociology 56 (4)
(October): pp 521-41.
Goodchild, R (2015) ‘Property Cycles: Reflections by Dr Robin Goodchild’ LaSalle Investment Management, Chicago
http://www.lasalle.com/documents/Global-Real-Estate-Universe-February-2015.pdf
Goodchild, R (2016) ‘Nature of Property Cycles’ , Chapter 2 in Petersen, A (Editor) (2016) Commercial Mortgage Loans and CMBS:
Developments in the European Market 3rd Edition, Sweet & Maxwell, London
Korotayev, A, & Tsirel, S (2010) ‘A Spectral Analysis of World GDP Dynamics: Kondratieff Waves, Kuznets Swings, Juglar and Kitchin
Cycles in Global Economic Development, and the 2008–2009 Economic Crisis’ Structure and Dynamics Vol.4. #1. P.3-57
Ormerod, P (1994) ‘The Death of Economics’ Wiley, London
Plender, J (1982) ‘That’s the way the money goes – The Financial institutions and the Nation’s Savings’ Andre Deutsche, London
Real Estate Finance Group (2014) A Vision for Real Estate Finance in the UK Investment Property Forum, London
Ross Goobey, A (1992) ‘Bricks and Mortals: Dreams of the 80s and the Nightmare of the 90s – Inside Story of the Property World’
Random House Business Book, London
Trepp LLC (2016) The Mid Year – CRE Market on the High Wire Commercial Real Estate Direct, Doylestown PA, USA
Wolf, M (2014) The Shifts and the Shocks: What We’ve Learned—and Have Still to Learn—from the Financial Crisis Penguin Group,
New York
World Economic Forum (2015) Emerging Horizons in Real Estate: An Industry Initiative on Asset Price Dynamics, Executive Case
Studies WEF, Geneva
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