Australian fund managers say the sub-prime woes have caused a fall in global property prices by up to 10 per cent.
Goldman Sachs JB Were (GSJBW) executives Tim Hannon and Andrew Smith pointed to a blow out in risk premiums as the source of falling asset values.
“We are yet to see a big transaction to prove that asset values have fallen but the likelihood is that they have probably fallen five to 10 per cent or thereabouts at this early stage,” according to Hannon, who is GSJBW Asset Management’s head of real estate.
“Debt providers are just asking for a higher return on their debt. That means equities and internal rates of return also have to go up and for that to happen, asset prices have to fall,” he said.
The assessments come as the global economy continues to weather the effects of the low doc mortgage crisis in the United States and fears are heightened about a US consumer-led recession.
Hannon said anecdotal evidence from large retailers in the United States and large-cap securities dealers in the United Kingdom and Europe showed the cost of capital has blown out by 25 to 75 basis points.
“That’s a nice way of saying property values have fallen,” he said.
“The cap rates have gone up but it actually has meant real estate has fallen. What we have seen in the market a drying up of liquidity. Sellers aren’t selling [and] moving the prices down, buyers have pulled back. The market hasn’t found its level yet.”
Andrew Smith, director of real estate for GSJBW Asset Management, said Australian property trusts that invested only in offshore assets were down 6.3 per cent on earnings, while domestic-only property trusts were up 9.7 per cent.
Smith said the earnings of hybrid trusts – those with a mix of offshore and domestic property assets – had risen five per cent.
“There’s been a real disparity of returns between the pure offshore guys and pure domestic,” Smith said.
