Latest rise in gilt yields means property values are likely to keep shrinking - economist
Published: 07:50 14 Jul 2023 EDT
Higher gilt yields mean UK property looks overvalued, with a potential further 5% fall in capital values this year, according to analysis by Capital Economics.
Despite the recent surge in gilt yields, with 10-year yields having recently topped now 4.5%, there has not been the same surge to sell property assets as was seen in the wake of the mini-budget in September, observed property economist Matthew Pointon.
Just under £80mln was withdrawn from property funds in June, less than half the £184mln taken out in October last year, according to industry data from Calastone.
In part, the increased stability in property funds more recently is because the rise in yields has been steadier and also because capital values have fallen and pension funds have altered their exposure to the liability-driven investments that caused most of the problems last autumn, he said.
“The good news is that argues against further fire sales of property assets today,” Pointon wrote.
That said, he said higher gilt yields will still be a negative for commercial property capital values.
“After all, despite the recent surge in property yields, the latest rise in gilt yields has left the spread between the 10-year yield and the May all-property equivalent yield at just over 200bps. That was close to the level reached prior to the sharp repricing of commercial property in Q3 last year.”
While his team expects the 10-year yield to fall back to 4% by the end of the year, Pointon said an additional rise in property yields of around 40-50 basis points this year is “required to bring property back towards a fairer valuation”.
Coupled with a forecast of a slowdown in rental growth, that implies the forecast for a 5% fall in capital values across all property.
“And while another crash in capital values should be avoided, the latest rise in yields means that capital value adjustment may now happen slightly faster than we had originally anticipated.”
