How do you bail banks out the hole into which one subset of the ‘Masters of the Universe’ had driven them? The Irish Government, faced with a bigger problem as a percentage of GDP than most, chose, rather than a bank-by-bank resolution, to place a large proportion of the problem property loans into a specially formed Agency, NAMA, tasked with managing the resolution of the loans in an orderly manner over 10 years. At our lunch on 15th September 2011 we were fortunate to have Ronnie Hanna (Head of Credit and Risk for the National Asset Management Agency) to tell us how this project was working out.
The size of the task is prodigious, £72 bn of loans, 60% of which concerned Irish property and 32% in the UK, including Northern Ireland, with the balance in USA and Europe. Ronnie made clear to us that the fundamental principle for NAMA was orderly disposal or working out, with no fire sale element. In principle, the scheme is neither a bail-out of borrowers, who will be expected to repay the loan eventually, nor is it a bail-out of the banks as they will hold the losses on ultimate wind-up. This principle is key to the relationship between NAMA and all the parties involved; whilst, in reality, it will not be wholly achievable, the discipline it brings is crucial to the project.
The majority of loans have remained in the legal ownership of the lending bank, but, for each loan, the bank is required to prepare a realistic ‘business plan’ under the eagle eye of NAMA. Once the plan is agreed, NAMA is able to issue a ‘letter of support’ which will help the bank in dealings with third parties. If additional funding is required to oil the resolution, and it cannot be raised elsewhere despite the ‘letter of support, then, provided that it is in line with the business plan, NAMA is able to provide it, on commercial terms. It is a feature of the scheme that the banks, who do much of the work, are left with some of the upside if things go well; whilst, to some, this seems like rewarding failure, Ronnie argued that it is pragmatic to give the banks some incentive.
In some of the questions that followed Ronnie’s talk, there was an undertow of criticism that NAMA was sometimes getting in the way, perhaps an inevitable danger for an intermediary interjected into a previous commercial relationship. Ronnie was vigorous in his defence. Often complaints amount to a criticism of a price being demanded by NAMA, but investors must realise that they are not picking over a corpse; his task is to secure optimum resolution, and his needs will often quite properly not match the particular wishes of some purchaser; so be it! He was confident that the ‘assets’ confided to his care would, in due course, almost all find proper resolution, perhaps sometimes following co-operation with other agencies of government; there may be a small residue of land that will have to revert to, or remain as agricultural land, but that will be trivial when compared with the starting position.
Ronnie was very firm that NAMA was proving to be part of an innovative solution to what had seemed, at the outset, to be an unbearable problem. Your Scribe has always had the prejudice that the Irish were a bit tricky, particularly in loose play around the back of the scrum. Ronnie convinced him that, here, they had found an interesting way of getting the ball away in more profound circumstances.
Michael Mallinson
Monday, September 19, 2011
Monday, May 23, 2011
Do Greener Buildings Really Mean More Value?
Whilst your Scribe can safely be thought to be ‘out of touch’ in most things, he senses a continuing scepticism amongst many, perhaps most building owners about the ‘green’ agenda; it is widely seen as just one more impediment for landlords. At our Lunch on 19th May 2011, George Fowkes, Co-Founder of Low Carbon Workplace, sought to convince an audience that was by no means as sceptical as I have suggested that greenness can be seen in a positive light.
The Government has set ambitious carbon targets: an 80% cut in emissions by 2050. There is no doubt that property, contributing 20% to current emissions, is seen as a soft, as well as a necessary target. Perhaps justifying a negative perspective, potential taxes are in place to bully, and ‘Display Energy Certificates’ will be seen as a tool to shame. However, the real driver for change will lie in energy-pricing and the anxiety of occupiers, who ultimately meet energy charges, to minimise a growing threat to their bottom line.
Whilst BREEAM assessments and debates about ‘embodied carbon’ address important issues, George expressed the view that these are unlikely to be real drivers of value in the market place. He suggested four headings that might be:
1. Access to public transport. If Government continues to squeeze the cost of motoring, which it is likely to do to the bounds of political possibility, less dependence upon it will be attractive to occupiers in attracting staff and customers.
2. Buildings that offer ‘smart passive systems’ – not too much glass, high ceilings, open spaces etc. These will offer tangible advantage to occupiers.
3. Efficient active systems, particularly good zonal controls so that energy use matches closely actual building use, mitigating waste. (Your scribe has just bought a kettle that boasts its ability to boil ‘only the amount of water you need’ – but he still overfills it!)
4. Landlord engagement with occupiers. For example contractual parameters for energy use, with costs and benefits being shared. The equipment of buildings with extensive metering and monitoring systems will be a selling point of value.
Rather than an incidental, George sees energy use and cost as becoming an active, and perhaps disputatious, component of the landlord/tenant relationship. If this is correct, landlords need to develop strong ‘test as you go’ methods, not only in developing and refurbishing buildings, but in their continuing running.
One questioner raised the implicit conflict between building conservation and listing, and energy efficiency. It was George’s view that the latter is now the louder voice, and English Heritage will have bend to meet that reality. Another questioner, whilst accepting George’s argument in high cost/high demand London, wondered whether the value issue will prove so real in the provinces. George refuted this view, arguing that growing energy costs will prove painful wherever they are incurred.
In some cases, reducing energy consumption may have quite high initial costs, but George left us with the view that most buildings present opportunities for short payback with basic and simple stuff - a positive message to end a lucid and entertaining presentation.
Michael Mallinson
The Government has set ambitious carbon targets: an 80% cut in emissions by 2050. There is no doubt that property, contributing 20% to current emissions, is seen as a soft, as well as a necessary target. Perhaps justifying a negative perspective, potential taxes are in place to bully, and ‘Display Energy Certificates’ will be seen as a tool to shame. However, the real driver for change will lie in energy-pricing and the anxiety of occupiers, who ultimately meet energy charges, to minimise a growing threat to their bottom line.
Whilst BREEAM assessments and debates about ‘embodied carbon’ address important issues, George expressed the view that these are unlikely to be real drivers of value in the market place. He suggested four headings that might be:
1. Access to public transport. If Government continues to squeeze the cost of motoring, which it is likely to do to the bounds of political possibility, less dependence upon it will be attractive to occupiers in attracting staff and customers.
2. Buildings that offer ‘smart passive systems’ – not too much glass, high ceilings, open spaces etc. These will offer tangible advantage to occupiers.
3. Efficient active systems, particularly good zonal controls so that energy use matches closely actual building use, mitigating waste. (Your scribe has just bought a kettle that boasts its ability to boil ‘only the amount of water you need’ – but he still overfills it!)
4. Landlord engagement with occupiers. For example contractual parameters for energy use, with costs and benefits being shared. The equipment of buildings with extensive metering and monitoring systems will be a selling point of value.
Rather than an incidental, George sees energy use and cost as becoming an active, and perhaps disputatious, component of the landlord/tenant relationship. If this is correct, landlords need to develop strong ‘test as you go’ methods, not only in developing and refurbishing buildings, but in their continuing running.
One questioner raised the implicit conflict between building conservation and listing, and energy efficiency. It was George’s view that the latter is now the louder voice, and English Heritage will have bend to meet that reality. Another questioner, whilst accepting George’s argument in high cost/high demand London, wondered whether the value issue will prove so real in the provinces. George refuted this view, arguing that growing energy costs will prove painful wherever they are incurred.
In some cases, reducing energy consumption may have quite high initial costs, but George left us with the view that most buildings present opportunities for short payback with basic and simple stuff - a positive message to end a lucid and entertaining presentation.
Michael Mallinson
Wednesday, March 23, 2011
State of the Property Finance Market and Alternative Sources
When addressing our Lunch on 17th March 2011, Wilson Lee, Managing Partner of First Growth Real Estate Capital LLP, was confronting a topic of close interest to all his audience – how and when will the capital markets return to normal?
He started his talk with a resumé of how we got into this pickle in the first place. It might be summarised as a thorough exercise of what I paraphrase as 'due indigence': people failed to think through the inherent risks of domino effects in the structures that were being created, and didn’t build the contracts properly. When the music stopped, financial institutions across the Western World found themselves short of several chairs.
The political and fiscal responses, and uncertainties about what those responses might be, led, perhaps inevitably, to a capital market distorted in many respects. Banks are still in a state of flux. Whilst many US Banks have 'marked to market', that process is, in Wilson’s view, by no means complete in Europe; this implies more pain to come, and more reluctance to lend. In Europe, around £260bn of bonds fall due in 2011/12. Whilst some of these may be extended, there will be a very substantial pool to be re-financed in what will be a highly unfavourable climate. Wilson’s worry is that, as and when interest rates start to rise, lender tolerance will recede. This will lead to increasing defaults, cranking up the pain to the Banks. There are signs of this already as applications to the ECB for emergency loans have exploded.
Against this torrid background, investors crave liquidity and security; if both are not available, prices take a big hit. In property terms, we have moved from a position of the spread between prime and secondary property being too narrow during the bubble years to being too wide today; as an aside, Wilson thought that this might indicate some opportunities.
It was a testament to Wilson’s delivery skills and the value of what he was saying that, up to this point, there had been no suicides amongst members or guests. How will it all be resolved? Wilson was clear that there are more failures to come before the system is purged. There is, however, no shortage of capital in the world – witness, for example, Sovereign Wealth Funds. There is fear, and there is a mismatch between investors’ expectations and the returns that are actually likely to be available to them. Fear should recede if governments take steps to encourage wealth creation, both at the macro-economic level and in local initiatives. Wilson was also optimistic, I think(!), that Institutions will identify the opportunities open to them whilst the Banks occupy the Recovery Ward. In case that made us happy, however, Wilson suggested that we were not yet half way through the trough, if the previous upsets for capitalism were anything to go by.
Michael Mallinson, Scribe
He started his talk with a resumé of how we got into this pickle in the first place. It might be summarised as a thorough exercise of what I paraphrase as 'due indigence': people failed to think through the inherent risks of domino effects in the structures that were being created, and didn’t build the contracts properly. When the music stopped, financial institutions across the Western World found themselves short of several chairs.
The political and fiscal responses, and uncertainties about what those responses might be, led, perhaps inevitably, to a capital market distorted in many respects. Banks are still in a state of flux. Whilst many US Banks have 'marked to market', that process is, in Wilson’s view, by no means complete in Europe; this implies more pain to come, and more reluctance to lend. In Europe, around £260bn of bonds fall due in 2011/12. Whilst some of these may be extended, there will be a very substantial pool to be re-financed in what will be a highly unfavourable climate. Wilson’s worry is that, as and when interest rates start to rise, lender tolerance will recede. This will lead to increasing defaults, cranking up the pain to the Banks. There are signs of this already as applications to the ECB for emergency loans have exploded.
Against this torrid background, investors crave liquidity and security; if both are not available, prices take a big hit. In property terms, we have moved from a position of the spread between prime and secondary property being too narrow during the bubble years to being too wide today; as an aside, Wilson thought that this might indicate some opportunities.
It was a testament to Wilson’s delivery skills and the value of what he was saying that, up to this point, there had been no suicides amongst members or guests. How will it all be resolved? Wilson was clear that there are more failures to come before the system is purged. There is, however, no shortage of capital in the world – witness, for example, Sovereign Wealth Funds. There is fear, and there is a mismatch between investors’ expectations and the returns that are actually likely to be available to them. Fear should recede if governments take steps to encourage wealth creation, both at the macro-economic level and in local initiatives. Wilson was also optimistic, I think(!), that Institutions will identify the opportunities open to them whilst the Banks occupy the Recovery Ward. In case that made us happy, however, Wilson suggested that we were not yet half way through the trough, if the previous upsets for capitalism were anything to go by.
Michael Mallinson, Scribe
Wednesday, January 26, 2011
The Year of Living Dangerously
Our luncheon guest speaker for January 20, 2011 was Walter Boettcher, Colliers International. The year 2010 was better than most had forecast. However, he said there are a number of downside risks for 2011 –
- Inflation - Is it the wrong type? Main headline inflation is being caused by oil, food and commodities as a result of demand from emerging markets, and this is forecast to continue.
- Eurozone Collapse – sovereign defaults and the possibility of a country going bust.
- Currency Wars – ongoing tension with China, the US and the rest of the world.
- Food Risks – risk of reduced production and continued increase in demand from population growth.
- Natural Disasters
There was a big bounceback in values in 2010.
Secondary assets are vulnerable to a potential pricing readjustment, especially if the banks ‘open the floodgates’ of putting distressed properties on the market. For NAMA there was no real focus yet. However, Lloyds and RBS were moving forward as they now have the teams in place.
The HOT sectors were
The concerns over property and inflation were making people question if property was truly a hedge against inflation. Do equities actually provide a better bet?
Asset management in 2011 will be the main factor that will drive property performance.
| Total return forecasts | 2011 | 2012 |
| Colliers: | 7.5% pa | 10.6% pa |
| Derivatives implied return: | 4.5% pa | 2.5% pa |
Respectfully submitted,
Shailendra Shah
Monday, December 13, 2010
UK Market Pauses for Breath
An Analysis of Diverging Performance Trends
Phil Tily, UK and Ireland Managing Director of Investment Property Databank (IPD – www.ipd.com), does not, on first appearance, seem very like an angel – lacking the obligatory wings. However, he fulfils the function of recording angel for the commercial property investment industry. At our lunch on 9th December 2010 he gave us a masterly thumbnail sketch of the view this task gives him of the UK market and its drivers. At the macro level, his analysis of property portfolios demonstrates two things: over extended periods, property at the asset level loses value due to depreciation – ‘gather ye income whilst ye may’, but within that trend changes in investor sentiment leads to considerable variation. Secondly, the various sectors of the market tend to move in tandem and he rather wonders whether the investor’s mantra should change from ‘location, location’ to ‘timing, timing’; it seems clear that, in good times, all benefit, but in decline strategy becomes crucial. Within that long term framework, in recent times values in the investment markets that he analyses have recovered to levels that are consonant with a long term trend – way below the speculative peaks of early 2007, peaks driven by easy borrowing and retail commoditisation of property, but above the low point of June 2009 and now much on a par with the early 2000s. In response to a question, he relied upon his heavenly status and was not willing to be drawn on whether that implied ‘fair value’. This recovery, however, now seems to have lost momentum. Has it run its course and are we now at a point of inflection for investor sentiment? Is this the point for momentum investors to leave the room? The bear factors include the amount of debt not yet unwound, the prospect of rather extended economic weakness, doubts about the ability of the private sector to take up the slack arising from government retrenchment and, perhaps, the prospect of government bond yields rising. Against this lies the apparent weight of overseas money still seeking UK assets.
Looking at the market at present, and perhaps belying a little his dislike of ‘location, location’, it seems clear that the focal point of further strength in the market will be London-based. London and the South East seem to be the only areas that possess the economic strengths that will enable growth in the new economic climate; other areas will suffer from government retrenchment, but have little to fall back on. London, less so the South East, is also the area that foreign investors find attractive. As to prime versus secondary, whilst, by definition, prime rents are more secure and prices hold up better over time, the yield available on secondary property seems to him to be rather tempting; if total returns are going to be less than in the past, income becomes more significant. Beyond that, whilst the price differential may widen alarmingly at times of trouble, it narrows when bluer skies return. In the London office market there are also interesting possibilities in changes of definition. The all-singing and all-dancing large plate dealing floors may, with modern wireless technology, seem over-specified; modesty may command a premium. Risky, perhaps, but tempting.
Finally Phil gave us, not a forecast, but an interesting statistic (not that his others were uninteresting!). His research shows that, in the 3 years following an Australian win in the Ashes UK values rise by 4.5%. After an England win they rise by 16%. There was only one person in the room willing to short UK property.
Michael Mallinson, Chapter Scribe
Phil Tily, UK and Ireland Managing Director of Investment Property Databank (IPD – www.ipd.com), does not, on first appearance, seem very like an angel – lacking the obligatory wings. However, he fulfils the function of recording angel for the commercial property investment industry. At our lunch on 9th December 2010 he gave us a masterly thumbnail sketch of the view this task gives him of the UK market and its drivers. At the macro level, his analysis of property portfolios demonstrates two things: over extended periods, property at the asset level loses value due to depreciation – ‘gather ye income whilst ye may’, but within that trend changes in investor sentiment leads to considerable variation. Secondly, the various sectors of the market tend to move in tandem and he rather wonders whether the investor’s mantra should change from ‘location, location’ to ‘timing, timing’; it seems clear that, in good times, all benefit, but in decline strategy becomes crucial. Within that long term framework, in recent times values in the investment markets that he analyses have recovered to levels that are consonant with a long term trend – way below the speculative peaks of early 2007, peaks driven by easy borrowing and retail commoditisation of property, but above the low point of June 2009 and now much on a par with the early 2000s. In response to a question, he relied upon his heavenly status and was not willing to be drawn on whether that implied ‘fair value’. This recovery, however, now seems to have lost momentum. Has it run its course and are we now at a point of inflection for investor sentiment? Is this the point for momentum investors to leave the room? The bear factors include the amount of debt not yet unwound, the prospect of rather extended economic weakness, doubts about the ability of the private sector to take up the slack arising from government retrenchment and, perhaps, the prospect of government bond yields rising. Against this lies the apparent weight of overseas money still seeking UK assets.
Looking at the market at present, and perhaps belying a little his dislike of ‘location, location’, it seems clear that the focal point of further strength in the market will be London-based. London and the South East seem to be the only areas that possess the economic strengths that will enable growth in the new economic climate; other areas will suffer from government retrenchment, but have little to fall back on. London, less so the South East, is also the area that foreign investors find attractive. As to prime versus secondary, whilst, by definition, prime rents are more secure and prices hold up better over time, the yield available on secondary property seems to him to be rather tempting; if total returns are going to be less than in the past, income becomes more significant. Beyond that, whilst the price differential may widen alarmingly at times of trouble, it narrows when bluer skies return. In the London office market there are also interesting possibilities in changes of definition. The all-singing and all-dancing large plate dealing floors may, with modern wireless technology, seem over-specified; modesty may command a premium. Risky, perhaps, but tempting.
Finally Phil gave us, not a forecast, but an interesting statistic (not that his others were uninteresting!). His research shows that, in the 3 years following an Australian win in the Ashes UK values rise by 4.5%. After an England win they rise by 16%. There was only one person in the room willing to short UK property.
Michael Mallinson, Chapter Scribe
Thursday, December 2, 2010
Like Nowhere Else
'Like Nowhere Else' - London's West End saw strong growth in 2009 and 2010. Is it set for further growth? Or could growth stall and reduce in 2011 and beyond?
Richard Dickinson gave us an erudite overview of the economic and political environment and prospects for the West End. He set out the positives behind significant strong performance in the midst of recession. At the same time questioned, with the era of austerity upon us, how can the West End continue to invest to keep it as a World Class destination?
Some of the answers lie in the continued success and support of the private sector to the Business Improvement District. Property owners could provide matched funding to the expected BID renewal at the end of 2011. The private sector is however already facing the 2% Business Rate supplement to help fund Cross Rail. This overall £16bn investment should add 30% capacity to tube travel. Westminster is examining ways to retain and reallocate rateable values. It has already been innovative in agreeing S106 credit offsets for investment in the public realm. Tax incremental finance is a medium term possibility for 2013 onwards.
The positives for the West End in 2010 are an 8% pa increase in sales, record rental levels, plus significant investment in flagship stores. These positives being supported by low interest rates, relatively strong economy (65% consumer driven) and growing tourism visits (25% are overseas visitors with a further 20% of visitors from the rest of the UK) helped by the level of the £. Also with a strong bias towards fashion the retail offer is more resilient to the impact of on line spending. The issue is the extent to which these factors continue to underpin growth or whether the VAT and NI increases in 2011 will slow or even reverse these trends.
In a lively Q&A the wide ranging discussion covered the impact of the 2012 Olympics, other suburban and out of town retailing, and whether the West End is and will struggle to maintain its identity. With rents escalating where is space for the street trader and independent retailer? Can the New West End Company ensure the West End keeps its true London identity and heritage, whilst being a destination for the worlds' and UK's leading branded Retailers?
Michael Mallinson
Scribe
Richard Dickinson gave us an erudite overview of the economic and political environment and prospects for the West End. He set out the positives behind significant strong performance in the midst of recession. At the same time questioned, with the era of austerity upon us, how can the West End continue to invest to keep it as a World Class destination?
Some of the answers lie in the continued success and support of the private sector to the Business Improvement District. Property owners could provide matched funding to the expected BID renewal at the end of 2011. The private sector is however already facing the 2% Business Rate supplement to help fund Cross Rail. This overall £16bn investment should add 30% capacity to tube travel. Westminster is examining ways to retain and reallocate rateable values. It has already been innovative in agreeing S106 credit offsets for investment in the public realm. Tax incremental finance is a medium term possibility for 2013 onwards.
The positives for the West End in 2010 are an 8% pa increase in sales, record rental levels, plus significant investment in flagship stores. These positives being supported by low interest rates, relatively strong economy (65% consumer driven) and growing tourism visits (25% are overseas visitors with a further 20% of visitors from the rest of the UK) helped by the level of the £. Also with a strong bias towards fashion the retail offer is more resilient to the impact of on line spending. The issue is the extent to which these factors continue to underpin growth or whether the VAT and NI increases in 2011 will slow or even reverse these trends.
In a lively Q&A the wide ranging discussion covered the impact of the 2012 Olympics, other suburban and out of town retailing, and whether the West End is and will struggle to maintain its identity. With rents escalating where is space for the street trader and independent retailer? Can the New West End Company ensure the West End keeps its true London identity and heritage, whilst being a destination for the worlds' and UK's leading branded Retailers?
Michael Mallinson
Scribe
Thursday, September 30, 2010
Sovereign Debt Crisis
and the consequences for real estate
a presentation by Jose Luis Pellicer of the Research Team at AEW Europe
I have never had a serious operation, but I recalled my limited experiences during Jose’s address to our lunch on 16th September 2010. You are woken after the operation, with the surgeon staring at you. You, at first, wonder whether he is St Peter or the other chap, but then he reassures you that the operation went well. After a moment’s relief, your thoughts then turn to how awful you feel and how impossible it will be to recover. Well, Jose assured us that the operation of rescuing the financial system had gone well -– "Armageddon avoided" as he put it. But the cost has been vastly over-extended government finances in most of the major economies. Recovery involves the unwinding of that. His prognosis was that the job would take at least another 12 to 18 months, with the pain making physiotherapy look a doddle. Should governments not address the issue and default, then that would be even more painful in our sophisticated market economies. In response to a question, whilst there are clear risks for Greece, and, to a lesser extent, for Portugal and Ireland, many others who offer poor stats may not be as weak as they seem. For example, in Spain its 20% unemployment figure includes many immigrants who may return home, and household indebtedness is much less than in the UK. He therefore presently sees little risk of a domino effect to major economies – provided that we take the medicine (or do the exercises!).
Jose could not see the cavalry arriving in the form of non-Western economies. South America is too small to be material, and China shows every sign of over-heating – which would be very negative for Germany and Eastern Europe.
The only realistic tool available to most governments is to reduce expenditures; waiting for economic growth to rebalance the books is not a viable option. Our concern must therefore be on the effects of this solution on real estate.
In some ways, we have been in a sort of ‘phoney war’ since the immediate crisis was stemmed. Not unnaturally, the immediate effect was to make investors risk-averse. This favoured, perhaps paradoxically, government bonds and also apparently-secure forms of real estate, thus buoying prices, but Jose doubts whether that will be sustained. The occupation market is bound to be hit and this must, surely, cause yields to soften – perhaps considerably. He particularly drew attention to the retail and ‘logistical’ market. Demand is bound to fall, perhaps dramatically. In many parts of Europe there are already worrying levels of retail over-supply. One questioner asked whether the weight of money could see property yields harden however due to inflationary fears; Jose thought not.
All-in-all, Jose was not a bearer of good tidings. If the issues are faced, there will be pain, but recovery will come. He was asked whether the process might not become politicised; whilst accepting that this was a risk, and, inevitably, cuts will require political decisions, he was optimistic that politicians would not worsen the situation. That was about the only positive note your Scribe was able to write down, plus, of course, the pleasure of hearing a speaker who was master of his subject. We wish Jose well in front of a ‘home’ audience when he speaks at the inaugural lunch of the new Chapter in Madrid on the 29th September.
Michael Mallinson
Scribe
a presentation by Jose Luis Pellicer of the Research Team at AEW Europe
I have never had a serious operation, but I recalled my limited experiences during Jose’s address to our lunch on 16th September 2010. You are woken after the operation, with the surgeon staring at you. You, at first, wonder whether he is St Peter or the other chap, but then he reassures you that the operation went well. After a moment’s relief, your thoughts then turn to how awful you feel and how impossible it will be to recover. Well, Jose assured us that the operation of rescuing the financial system had gone well -– "Armageddon avoided" as he put it. But the cost has been vastly over-extended government finances in most of the major economies. Recovery involves the unwinding of that. His prognosis was that the job would take at least another 12 to 18 months, with the pain making physiotherapy look a doddle. Should governments not address the issue and default, then that would be even more painful in our sophisticated market economies. In response to a question, whilst there are clear risks for Greece, and, to a lesser extent, for Portugal and Ireland, many others who offer poor stats may not be as weak as they seem. For example, in Spain its 20% unemployment figure includes many immigrants who may return home, and household indebtedness is much less than in the UK. He therefore presently sees little risk of a domino effect to major economies – provided that we take the medicine (or do the exercises!).
Jose could not see the cavalry arriving in the form of non-Western economies. South America is too small to be material, and China shows every sign of over-heating – which would be very negative for Germany and Eastern Europe.
The only realistic tool available to most governments is to reduce expenditures; waiting for economic growth to rebalance the books is not a viable option. Our concern must therefore be on the effects of this solution on real estate.
In some ways, we have been in a sort of ‘phoney war’ since the immediate crisis was stemmed. Not unnaturally, the immediate effect was to make investors risk-averse. This favoured, perhaps paradoxically, government bonds and also apparently-secure forms of real estate, thus buoying prices, but Jose doubts whether that will be sustained. The occupation market is bound to be hit and this must, surely, cause yields to soften – perhaps considerably. He particularly drew attention to the retail and ‘logistical’ market. Demand is bound to fall, perhaps dramatically. In many parts of Europe there are already worrying levels of retail over-supply. One questioner asked whether the weight of money could see property yields harden however due to inflationary fears; Jose thought not.
All-in-all, Jose was not a bearer of good tidings. If the issues are faced, there will be pain, but recovery will come. He was asked whether the process might not become politicised; whilst accepting that this was a risk, and, inevitably, cuts will require political decisions, he was optimistic that politicians would not worsen the situation. That was about the only positive note your Scribe was able to write down, plus, of course, the pleasure of hearing a speaker who was master of his subject. We wish Jose well in front of a ‘home’ audience when he speaks at the inaugural lunch of the new Chapter in Madrid on the 29th September.
Michael Mallinson
Scribe
Subscribe to:
Posts (Atom)