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Stefan Wundrak

Come into my shop... advertised prices not always guaranteed!

Stefan Wundrak (Director of Research, Property) talks about how difficult it is to obtain accurate yield data.

Libor is an index that measures the cost of borrowing money to large global banks operating in London. Each day, the British Bankers' Association surveys a panel of banks, asking the question: at what rate could they borrow funds on a given day? The average of answers is then reported to the market.

As banks do not trade with eachother via public exchanges, Libor is the attempt to make market prices transparent. Property investment markets face the same problem as yields across most of Europe are usually kept private between the parties involved. Agents get a glimpse at many deals and property markets’ functioning relies on them to publish prime yields or average cap rates as guidance.

Libor was introduced at a time when London’s bankers were pinstriped gentlemen in bowler hats carrying black umbrellas and knew each other personally. In such a world, fiddling the interest rate submitted to the Libor survey seemed inconceivable. With the gentlemen long retired, the Libor scandal unfolding since 2012 has demonstrated the potential unreliability of market price indices derived from essentially private information.

As there are only a handful of property agents publishing yields, one assumes that the group is small enough to uphold a gentleman’s agreement to report accurately. Just like the bankers, however, agents are also interested parties. Opaque markets are good for them as the less market participants know, the more relevant their services are. This may explain why property agents do next to nothing to overcome the net gross yield confusion common across Europe.

Agents earn fees on deal volumes and may be tempted to present their local market as more attractive by overstating the achievable yield. The Henderson Property Research team suspect the latter might be happening quite regularly. In particular, markets which have fallen out of favour tend to report enticingly high market yields with evidence from actual deals few and far between. Accordingly, hot markets often seem suspiciously slow with the reporting of downward yield adjustments.

We are well aware of this issue and therefore have never relied solely on agents for our in house yield data. Instead, every quarter we piece together yield information from a variety of sources, including the Henderson Property Investment team. One thing is clear, correct starting points are a necessary precondition for producing useful forecasts.

Stefan Wundrak

Stefan Wundrak

Head of European Research

Stefan's biography