In case we forgot, 2016 provided many indications that on any given day, we are going to be humbled by our inability to predict events. Through the daily barrage of unexpected headlines, we were reminded that history (and historic change) is hard to predict and usually only obvious after the fact. Despite advances in technology, transparency and fact-gathering, we shouldn’t become complacent that the past is prologue or that we can anticipate future behavior based on old patterns.
In the not-too-distant past, if someone used the qualifier “disruptive”, they were generally talking about how new technologies were impacting industry – implying change, and the kind of change that typically takes cost and inefficiency out of a system. 2016 was the year when the power of disruption was refocused on political orders worldwide. Disruption has altered entire political establishments in countries around the world, most obviously the US, the UK and the dominant countries across Europe. As we write, we await the outcomes of further elections in the Netherlands, France and Germany, in order to assess what is left standing of the old Western political status quo.
This disruption would normally lead us to expect risk premiums to rise. It seems that this fundamental rule of investing has also been disrupted. To be fair, that was the immediate post-Brexit impact on pricing of London assets, but prices quickly returned to their pre-Brexit levels as most investors saw this as a buying opportunity. The twin catalysts of the ninth year of low interest rates and the ongoing need for current yield have substantially muted this recalibration of risk. Real estate prices essentially plateaued on a global basis last year. So, despite clear signals of added external risks, institutional investors continued to price assets at reasonably high levels, taking some comfort that fundamentals are generally positive. Investors are demonstrating increasing caution, but have remained consistently in the market, to this point. Despite the ever-present flock of black swans circling overhead, and little clarity about the consistency and stability of the world’s largest superpowers, the traditional characteristics of real estate assets have been reinforced during 2016. Real estate’s predictable current yield and the reasonable expectation of capital preservation (and over time, some appreciation), have all continued to be borne out. Institutional memories of the Global Financial Crisis (“GFC”) remain vivid, and leverage and development financing levels have been moderate for the most part (other than a truly startling increase in construction in downtown LA!).
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