College Papers

The On one hand, when the demand is

The Property cycle itself influences the rise and the
fall of its value, with yield
compression to start with: (falling yield= rising
property market and vice versa), is one of the main factors leading to it; On
one hand, when the demand is high, the cost of buying an investment commercial
property rises, and the more you pay, the less yields you get. This leads to
decreasing yields and that is what we call hardening
yields. On the other hand, when the yields increase due to low demand and
falling prices, we have softening yields.
Yield and Property market value are both driven by each other over time in an
endless property market cycle that requires different measures to take
depending on the peak of each period. See illustration below: (Land Securities
Group Plc., 2015)

Market Cycle. Land Securities Annual
Report 2015 (Land Securities Group Plc., 2015)

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Yield compression in turn
causes cyclical situations of bust and
boom, where during the boom, the economy grows and the
property market brings high values to its investors. As it is blooming and the
tenants demand is rising, the prices go gradually up until they are no longer
affordable and the market enters a state of stagnation. If, in that case, a
triggering element (e.g. financial crisis) occurs, the cycle is broken (bust) and prices start falling down
until the occupiers’ confidence is regained and their demand rises, which gets
the property market to recover and brings us back into a flourishing boom
situation. As the boom bust phenomenon can affect the market value differently:

When a boom occurs, banks
tend to make it easier to obtain credit as they start lending money at lower interest rates. Investors (businesses
and individuals) can then borrow money easily and cheaply and invest it in
commercial property. That way, they are likely to earn high returns on their
investments, and the economy grows.