A characteristic common to both the troubled banks and office tower owners is their investment into long-hold, illiquid assets which, when marked to market in the current environment, can crystallise material loss in value.
For commercial property, a key metric for determining value is the capitalisation rate. akin to a yield, which is also loosely correlated with interest rates. Cap rates so far have moved only marginally higher.
But the listed market made up its mind more than a year ago, rapidly selling down real estate investment trusts as 10-year bond yields moved higher. A Barrenjoey analysis this month shows the cap rates implied by market pricing of REITs are materially higher than those recorded by the REITs themselves. The market’s implied cap rate for office towers is almost 1 per cent hight than their 5 per cent recorded value, potentially equivalent to a near 20 per cent drop in capital value.
‘They’re trying to hold back the tide’
So far though, the owners of major CBD towers, both listed players and unlisted privates such as super funds, have barely budged in their valuations and cap rate adjustments.
Winston Sammut, investment manager at Sequoia Asset Management, says some listed office tower owners may be hoping they ride through the rising rate cycle without realising marked-to-market losses.
“The [fund] managers have been reluctant to adjust cap rates in line with what’s happening in the interest rate market,” said Mr Sammut.
“What they’re…
