Futurology - Global debt and the impact on investment yields

Futurology

$217 trillion is the current estimated size of world debt. Global debt has increased 20% since the onset of the GFC in 2007 through growth in sovereign and private debt.

Sovereign debt has doubled since the onset of the GFC from $30 trillion to $60 trillion as financial organisations have been brought onto government balance sheets, whilst large amounts of quantitative easing have been undertaken.

There are two key points of concern regarding sovereign debt:

1) The interest payments are not tax deductible; and

2) What if the taxpayers leave?

Regarding point one; in Pakistan, government debt to GDP stands at approximately 60 percent. This grew from 3 trillion rupees in 1999 to a little over 14 trillion rupees in 2013. The interest payments and debt repayment schedules alone constitute an excessive burden on government revenue.

As to point two, recent examples of population decline include Stockton and Detroit in the United States. Stockton, a town in California has a population of 300,000 and in 2008, one in thirty houses were in foreclosure and house prices fell 44%. In July 2012, the City of Stockton filed for bankruptcy protection.

Detroit also filed for bankruptcy protection with debts of around $20 billion in July 2013. From a peak population of 1.8 million in the 1950’s, the population fell to 700,000. More than half of the owners of Detroit’s 305,000 buildings did not pay their taxes in 2011, resulting in a revenue shortfall of over $245 million.

With world debt at unprecedented levels, if global interest rates were to rise substantially, the amount of money paying interest would divert from elsewhere in the economy such that a severe recession would likely ensue.

Global Debt

Given the limited likelihood of substantially higher interest rates, investment yields on commercial property are expected to remain lower for longer.

To learn what’s next for commercial property yields, contact Tony Crabb, National Director, Research.

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