With close to two billion dollars in Assets under management Bawdens Managing Director Barry Cawthorn keeps a close eye on what drives prices up and down.
In the second of a two-part series, we continue to discuss the contents of a recent catch up with Barry.
You mentioned in issue 140 of Industrial Property News that you consider the prices of most things relative to each other to be fair citing 10-year Australian bonds at 1.3% and prime property yields at 3.5%-4.0% still.
We asked Barry, given the powerful role interest rates have in determining prices, isn’t it reasonable to see prices the highest they have ever been?
“It is one thing to say asset prices are fair relative to interest rates, but it is something very different to say rates will stay low, meaning prices will stay high (or rise further) and that leads us back to inflation.”
He went on to say.
“It isn’t hard to imagine the US Fed increasing interest rates from here either because the Fed lifts rates to stop the economy overheating or because rising inflation requires higher rates in order for real returns to be positive. So, whilst the possibility of a lift in rates is troubling, I do not think it can be said Commercial and Industrial property values today relative to current interest rates are high.”
So what can investors in property do in a more inflationary environment?
“Well there are several things. If the utility of the asset to an investor is at an end, meaning they have been using the property for productive business income. For example, say they wish to make real world decisions to close the business or retire then you sell and realise the value. However if the utility of the asset to you is to collect rent (and if inflation emerges, rentals will increase) then you retain the asset because you want to remain invested in assets where the price to use it (the rental) can be increased, so you retain your purchasing power.”