Author: Jonathan Webb - Categories: Procurement Strategy
The Economist's latest Global Housing Price Index has shown that property prices have increased in most markets across the globe. The data show a turnaround on last year, which saw price declines in nearly all markets. Coupled with the recovery in global trade, procurement may be in its last available window to obtain good value trades.
The Economist believes that many housing markets are overvalued, with the majority of countries' property markets inflated over the value of long-term, average price-to-rents ratios. However, when the PIU digs below the data, it reveals that the long-term real price of property is highly variable between countries.
The global financial depression has had a severe impact on property markets, with almost all markets experiencing a retraction between late 2008 and early 2009. Using 2005 as a base date, the sample of industrialised economies is split fairly evenly between observations. Countries with severe economic problems over the long term, such as Spain, Ireland and Japan, have seen real-term reductions since 2005, but as have other countries, such as Germany, the UK and the US.
Asian markets have seen inflation in their property markets, with economies such as China, Hong Kong and Singapore experiencing the highest rise in price levels. Despite these price rises, the Economist believes that these markets are only marginally overvalued.
One procurement manager recently said to the PIU: "That over the past decade a number took the opportunity to sell their premises, and leased them back in order to release capital. This is more like speculation, should procurement be speculating on property prices?"
Increasingly less organisations own their own premises, as a product of this speculation. Given that the Economist believes that average property prices are inflated above rental costs, there may be an argument to make that procurement got it right. Companies are reaping the benefit of shrewd speculative decisions in the past.
But this is a trick that an organisation can only play once.
The rent will need to be paid over many years, and with the real price of renting re-aligning with property prices, the cost of this may exceed the capital earned from selling the premises. Perhaps now is the last window before property prices become unaffordable in the medium term once again?