Expectations and yields

The Straits Times reported an exuberant article on office rents. Interestingly, Ms. Tay of Colliers International seems oblivious to the fact that "capital values" incorporate expectations of cash-flows:

"Rents have been racing ahead of capital values, said Ms Tay. This has led to a rise in the net yields of strata office property, from 3.2 per cent in early 2004 to 5.1 per cent now."

The article is silent on what "net yields" mean, but it could refer to the typical real estate capitalization rate which is a ratio of an office building's net operating rent income to the purchase price (or capital value) of an office building. The correct purchase price to use is an equilibrium purchase price. At equilibrium, a purchase price will include expected rent movements and the associated risks involved with an office development. (Equilibrium) Capital values would therefore not be lagging rents as purported. My guess is that Ms. Tay is referring to yields derived from short-run rent increases, disregarding whether such an increase is sustainable throughout the useful life of an office building.

Office rent and occupancy rates surging ahead
They are returning at a vigorous pace to boom year levels of the mid-1990s

By Joyce Teo, Property Correspondent
Sep 19, 2006
The Straits Times

OFFICE space is the hottest ticket in town, with rent and occupancy rates rising so fast that a return to the levels of the booming mid-1990s is in sight...

The average monthly rents of prime space in Raffles Place have risen by a whopping 34 per cent from January to $6.92 per sq ft (psf) in this quarter, according to consultants Colliers International.

'If this blistering pace continues, average monthly gross rents of Grade A space in Raffles Place will surpass 2001's peak of $7.77 psf by the middle of next year,' said its director for research and consultancy, Ms Tay Huey Ying.

The Colliers report also said that the average rents in the best sites in Raffles Place could pass 1996's all-time high of $9.77 psf by 2009 or earlier...

Ms Tay said rents could still rise by a further 6 per cent to 8 per cent before the end of the year and 15 per cent to 18 per cent next year...

Occupancy rates are another sign of the market's health. Average rates across the country have risen by 6.5 per cent to about 88.6 per cent in this quarter, said Ms Tay...

Rents have been racing ahead of capital values, said Ms Tay. This has led to a rise in the net yields of strata office property, from 3.2 per cent in early 2004 to 5.1 per cent now.