One of this aims of this blog is to try to highlight inconsistency between statements of supposed fact or intent by those with the power levers to try to extract us from the banking and property mess. In that vein, this entry looks at Brian Lenihan’s speech calling the bottom in September, 2009 in which he stated:
“The fall in property values has pushed up property yields. Yields are now above their long term average, and this suggests that values are bottoming out.”
This statement revealed a worrying ignorance of the property market, and given NAMA was a major plank in cleaning up the aftermath of the banking crisis through the management of property-backed loans, it prompted concern about Brian Lenihan being an amateur.
Yields are simply speaking annual rent divided by property value, and the idea is that if the yield is high that means you can go out and buy a property, rent it and you’ll get a good rate of return. In fact if the return from property is a lot better than you can get from your deposit account or other safe investments, then lots of people will go out and buy property. With more buyers in the market, the price of property will increase until yields come down to a level which places them at equilibrium with other investments. That’s the theory.
Except an idiot could have told Brian Lenihan that in a recession, the numerator in the yield calculation, the rent, it can fall and if it does then the yield falls and that makes property less attractive so you don’t get so many buyers and you don’t get increases in the price of property, in fact you may well get falls.
And today the Independent reports the findings of a survey by Retail Excellence Ireland and IBEC in which it was found that practically all retailers have sought rent reductions and given that only 1/3rd were refused, the conclusion is that 2/3rd of retailers have secured lower rents.
Lower rents = lower yields = lower commercial property prices ≠ “The Bottom”