For the second time now it seems that we are going from a little bit better to a lot worse in terms of the global real estate recovery. The world joined America and the UK in the crash at the end of 2008 and 2009 was the real year of the global crash. Since then we have had a recovery, a second round of declines, another period of improvement and now it is getting worse again, what's going on here?
Well, the first time we fell backwards was easy to explain; the recovery was artificial as it was brought about by governments flooding their markets with capital. It was inevitable that they couldn't spend at that level forever and when the money ran out the markets deflated again. But now it seems to be happening again – why?
The answer: the same thing that caused the first crash, credit and confidence only instead of it being US of A that is mainly to blame, this time it is the EU.
The biggest problem is definitely credit...
Financing is the single biggest obstacle faced by property investors, even some of the biggest property companies in the world are having trouble refinancing, and most of the big deals done in the past few months have been carried out by consortiums of multiple investors and firms.
During the first crash the banks tightened their lending criteria around the world and it has hardly slackened anywhere since.
On top of that you have the new EU regulations, under Basel III banks have to increase their Tier 1 capital ratios by around 9% by June 2012. Banks can do this in one or both of two ways. They can go to the market and raise additional equity finance, or they can reduce their loan portfolios, since the amount of capital they need is proportionate to the amount of risk on their books. Property lending carries a substantial capital reserve requirement so it makes eminent sense for banks to pull out of commercial property lending, or to make dramatic cuts in the amount that they are prepared to lend. And they are doing this.
This is obviously having the biggest effect on the European property markets. Investment in European retail property fell 64% in Q1 2012. And the most recent report comes from PropertyEU, stating that just 3.5 billion Euros worth of commercial real estate investment was transacted in Europe in April, compared to 5 million Euros in March and 7 billion Euros in April 2011.
But the European banks have also effectively taken themselves out of the refinancing cycle, which is having an effect on the global property market as well.
Closely Followed by Confidence
Confidence is also becoming a huge problem. Investors won't invest if they don't feel confident in the market and confidence is an extremely rare commodity.
Investors in Europe can barely get finance from banks, but those that can are thinking twice because they have doubts about refinancing when the terms come up.
Then you have the sovereign debt crisis in Europe. It has been over 2 years since the first Greek bailout, since then Portugal and Ireland have both also had bailouts and Greece has had a handful more, but only in Ireland is there any real sign that the situation is turning around. Portugal is in better shape than Greece, but we still can't escape the possibility that Spain, Italy or both will yet succumb to the need for a bailout.
If Spain or Italy need a bailout the EU is likely to collapse, if they both do it is almost certain to. All in all it is an uncertain time for Europe, combine that with the lack of financing and we can see that 2012 is going to be a bad year for European property investment.
But that is Just Europe
Thank fully not everywhere is as bad as Europe, but there are few bastions of hope.
Asia is no longer the golden boy it once was, as many markets allowed themselves to bubble even as the rest of the world had clearly popped. China is currently fighting to gently deflate its bubble rather than let it pop, and the same goes for Singapore. Thailand and Malaysia are also having to think about cooling things down. Cooling things down largely means reducing speculation, which mostly means reducing investment.
Eastern Europe has been a bright star in many a negative index over the last few years, but now eve it is succumbing to the lack of credit.
However, Germany is doing incredibly well, Scandinavia is yet to suffer any real damage and Turkey is a diamond in the rough with investment volumes soaring. In fact, Turkey is attracting more and more institutional investors to its shores as it becomes one of the only places in Europe that looks like growing, of course, its banking sector is incredibly strong and it isn't hit by the EU regulations.
America is an unlikely saviour. America was a hot commercial real estate market in 2010, and is much cooler now. However, the multi-family sector is hot as big investors buy and build apartment blocks to serve the rental boom that has ensued from the foreclosure crisis and tight lending.
Brazil in Latin America is a good investment bet, but it also suffers from a lack of financing. In fact, there are many hot markets in Latin America, Ecuador, Mexico etc, but these are high risk markets not for the faint hearted.
Likewise there are many hot markets in Africa that are experiencing good yields and capital growth, Nigeria, Kenya, but again these are high risk markets.
All in All...
All in all, even though we are now heading for five years since this crisis began, 2012 looks like a year where many of us will be strapping in for another bumpy ride.
- Friday 18 May 2012