It’s a Goldilocks Market, but there’s no Bears to be seen.

The confluence of low interest rates, punchy revenue generation and an Armada of well capitalized parties each in acquisition mode, has collectively lent itself to an asset class enjoying its best year of transactional activity nationally. Ever.

National Agency Market Share by Dollar Value

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Bear 1. Cost of Capital

Cost of capital, and in particular senior debt funding, is the primary market motivator at present and for the foreseeable midterm. Hence the RBA’s language, and indeed actions designed to mitigate any premature interest rate augmentation, can be seen as the veritable ‘bear spray’ it speaks to.

Bear 2. Legislative Headwinds

Legislative headwinds are the second paradigm we look towards when offering midterm market guidance; and although being in such a heavily regulated industry will mean any changes to current legislation will necessitate a strategic check-step by many stakeholders, there currently exists clear visibility around major amendments to key legislation guidelines. This, unlike other industries, is a very valuable differentiator and can be attributed to pro-active representative bodies.

Bear 3. Overheated Market

When markets heat up like the current market conditions exhibit, there is always the query raised about how hot is too hot?

The two key features we look towards when seeking to determine market temperature are depth and spread.

In terms of depth, we can report that buy-side bandwidth is at a level only witnessed every 10 years or more; hence there exists no shortage of demand for A grade assets.

Our reference to spread refers to the margin between the cost of funding and the capitalization rate or yield at which assets are being transacted. On this metric, and even when considering some material yield tightening over the past 12 months, we are still operating at a 400-500bps spread between the two measures. A buffer level of this complexion and magnitude is at the very vanguard of where this measure has been reflected historically; and it is for this reason we anticipate further yield contraction is not only highly likely, but is actually inevitable.

End.