By Tom Leahy on November 14th, 2017
Measuring property market liquidity has long been a challenge for investors, financiers and advisors. Equity market gauges such as the bid-ask spread are unavailable in the commercial real estate universe, therefore, how can one assess liquidity risk in markets without resorting to simple volume metrics?
Real Capital Analytics illuminates liquidity with the launch of the Capital Liquidity Scores. The scores aim to measure the depth and breadth of capital targeting all major real estate markets around the world, with a view that the greater the amount and diversity of capital, the more liquid a market is.
The benefit of this approach is that it is reliable, repeatable and robust because it is based on RCA’s comprehensive global transactions database. Therefore, users can measure capital liquidity in markets as diverse as Sao Paulo, Shanghai, Central London, San Francisco, and Cape Town using the same standardized methodology and a consistent data set subject to RCA’s rigorous checks and quality control.
The Capital Liquidity Scores use a mix of relative and absolute measures that are weighted before a final score is calculated. The model incorporates the traditional measure of volume in a market, as well as other measures such as number of unique buyers active in the market, the market’s share of the pool of global cross-border capital, the presence of institutional and REIT capital, and also the presence of top-ranked investors by zone (EMEA, Asia Pac, Americas) and globally. This methodology means we provide the greatest sense of how broad and deep the investor pool in a market is and the implication this has for liquidity.
The methodology of the Capital Liquidity Scores has undergone rounds of internal and external testing to vet its validity. Comparing the scores with the ask-sale price spread in Central London – one market where there is sufficient data on the spread – is one way we have validated the RCA approach to market liquidity. Analysis shows that the scores do reflect one of the traditional measures of market liquidity.
If you are an RCA client you can access the RCA Capital Liquidity Scores report, data file, and methodology document on the RCA website.