It is not all doom and gloom. Success is still possible even in this market. Capital is flowing and the opportunities exist, says Terry Green
Let us make it clear: we are not in a recession. A recession means that the whole economy contracts for two three-month periods in a row. We have relatively low interest rates and unprecedented prosperity. But doom and gloom is erupting everywhere. While it seems that most businesses are still doing well, the real estate and banking industries have suffered.
There have been so many mixed messages about where the real estate market is currently. Thanks to the recent intervention from the central banks. The financial system has seen the cost of issuing debt narrow slightly. Rights issues launched by RBS and HBoS have helped to encourage other banks to realise that a rights issue is not such a disastrous thing to do. The 90% take-up of the limited share offering by RBS indicates that the market is ready for better times.
Many banks and insurers have raised debt and a flood of other fundraising has emerged. British banks are preparing to draw down as much as £90bn (€114bn) from the Bank of England's Special Liquidities Scheme. Signs are emerging that banks are moving to lift the backlog of leveraged loans held on their balance sheets. It is clearly a tricky environment. We have to be nimble on our feet, flexible and patient. All will come good with time.
‘Emerging Trends in Real Estate in Europe' 2008 (issued by PriceWaterhouseCoopers in association with ULI) expects European Real Estate to be a complicated three-speed process this year. There will be corrections in Western Europe, stabilisation in Continental Europe and a chase for yield compressions in Central and Eastern Europe. European economies are slowing, but it is not disastrous.
As a result of the sub-prime crisis in the US, unleveraged equity investors are leading the march on Europe with capital in their hot little hands. Capital is mostly coming from private property vehicles and open-ended funds and sovereign wealth funds from the Middle East and the Asia Pacific region. European debt is still available but is not easy to find - and is not cheap. REITs have not been as popular or profitable but this is likely to change.
There has been more of a push into global real estate investment outside the UK and capitalisation rates for all property sectors are expected to move forward. For direct real estate, the focus is now the UK, Germany and France. Eastern Europe and Asia and also good markets and prospects include Moscow, Istanbul, Hamburg, Munich and Paris. Real estate players are looking at alternative investments including nursing homes, self-storage, caravan parks and petrol stations. The hotel sector is still popular as some investors have realised that this can be a profitable area too if it is understood. There is, however, some slowdown in this market too.
A global slowdown is clearly underway with growth projections for 2008 being adjusted downwards. The sharp deterioration in the US housing market has led to a cut in interest rates in the US with the Bank of England following, albeit more modestly. Asia remains mostly insulated from the economic slowdown but, even there, there are signs of weaknesses in Japan and in Singapore.
Economic growth globally is set to fall below 3% in 2008, which is a full percentage less than last year. In the UK there is likely to be a 1% drop in growth. Consequently there is a slowdown in work for the property professions. However, those professionals able to give a quality service are always rewarded with good quality work. There is still sufficient work to keep the wheels of industry (and their companies) turning. This can be seen from the increase in profitability of a number of professional firms with an April year-end.
As we know, the real estate capital markets have been in turmoil in the second half of 2007. After exponential average growth of 25% for the five years ending 2006, the global security markets posted a negative performance during 2007. Property shares fell 35% during the year but many other markets continued to perform strongly. The cessation in the securitisation market has increased the cost and reduced the availability of the finance-squeezing high leverage buyers out of the market. There has therefore been greater caution from buyers and a number of transactions have failed to complete. This year, investment volumes have fallen well behind those of 2007. Property derivatives have, however, had their best year, although even that market softened in the last quarter.
A slowdown does not mean the end of investment property and market funds. There remains significant structural opportunity. The fast pace in emerging economies such as China, India and Eastern Europe coupled with the shortage of real estate means there is significant potential for residential and retail asset acquisition in the market. As mentioned earlier, there is a wall of money coming from the Middle East, China and Eastern Europe looking for bargains in Europe (including the UK).
There is a feeling of quiet confidence about the market in many places and the future looks better than many anticipate. Focus on quality business is key. We always get strikes (such as the petrol tanker drivers in the UK) whether the economy is good or bad. The price of oil is a global issue but we need to adapt. Walking is something we seem to have forgotten about.
A key question is when will it get better? Many think that, post the US election in November 2008, confidence will return and the markets will pick up. This has historically proved to be the case.
It is time for the media to stop down-selling the situation. It will get better and central banks and funders will make sure that it does. Michael Slade of Helical Bar has recently produced ten rules for survival. The key is not to panic, stay flexible and take a holiday. We now need to get through a difficult but not insurmountable period. Success is still possible for all even in this market. Life will get better for us all. We all need to stay strong and focused and to think ahead and smile more.
Success is just around the corner!
Terry Green is head of international real estate finance at law firm Reed Smith