From the rapid increases in interest rates to the aftereffects of the pandemic, there are multiple generational events that the global economy is continuing to digest. However, there is increasing evidence of financial problems hidden beneath the surface that are raising some concerns. Investors need to watch their step.
I have been warning for a while now that central banks cannot increase interest rates from 0% to 5% with no consequences. Higher rates impact the entire economic system, not just people’s mortgages and businesses. Large corporations through to entire countries with high debts are feeling the pinch. So far, their impact is taking longer than I expected to flow through and cause a financial or economic mishap, but they will eventually.
There have been a couple of recent near misses. There was the run on the regional banks in the US that brought down Silicon Valley Bank and a close call for the UK pension funds. In both cases, disaster was averted but it is worth remembering that the underlying issues that created those problems are still lurking.
A recent property transaction in New York City highlighted just how much the world has changed in the past 5 years. Earlier this month there was an office building sold in NYC for US$50m. What stood out was that it was sold at a 67% discount to its 2018 purchase price of US$150m.
In 2018 interest rates were low, we hadn’t heard of covid and working from home was unusual. Compared to 2024 with much higher rates and office vacancy rates at much higher levels, the numbers and cash flows look radically different.
The real problems begin when owners in financial difficulty are forced to sell, or worse, the banks seize the property, and are selling. You end up with a glut of properties, no buyers, and increasingly desperate sellers. Prices fall and continue to fall. This leads to even more sales as desperation to get out before you cannot sell at all.
There are other signs too. Many organisations including BlackRock and Charter Hall have suspended or limited withdrawals from some of their office property funds. They are doing this preemptively to prevent investor withdrawals requiring them to sell assets at lower prices, potentially realising losses. This has not raised alarms so far, but it should have attracted much more attention than it has.
There are many of these funds holding billions of dollars of office property assets managed by large and small fund managers for investors. The proliferation of unlisted funds for everything from property to private credit raises real questions for investors as to how they get their money out if markets go the wrong way.
I have not seen a set of circumstances like this since the GFC and here in Australia not since the early 1990’s recession when record-high interest rates created a property and loan default crisis that almost sent Westpac Bank broke. This time around the big banks seem more conservative. The risk may well be with the organisations who filled the gaps.
I am not predicting this for the entire property market, but the office property market specifically has all the hallmarks for a situation like this to unfold. How that implosion, should it happen, flows through to financial markets and the general economy is a real risk. My concern is that the office building in NYC is not a one-off, but that it might be the first domino of many more to fall.
General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.