Tag Archives: risk

Fund managers face shakeout

The worst is yet to come for the European real estate fund management industry, according to Andrew Thornton, CEO of Internos Real Investors. ‘The next two years will bring an industry shakeout – ‘meltdown’ could be appropriate – in which the survivors will be those who go in strong and are most realistic in addressing investor concerns.’

[Original article published on PropertyEU]

In the latest issue of the company’s publication ‘Decisive Eye‘ (pdf; 1,86MB), Thornton points out that many fund management organisations have already been disbanded, taken over or cut down in size. ‘As the economic news grows ever more gloomy, real estate fund managers, weakened by three years of trimming sails to severe crosswinds, now face the perfect storm of a second recession, new demands from investors, institutions staffing-up to replace or duplicate their skills, looming peaks in loan and fund maturities, banks hamstrung by sovereign debt crises and threats posed by EU directives on alternative investments. Only the fittest will survive.’

Internos estimates that an investor determined to manage real estate investment on a do-it-yourself basis could create a convincing fund and asset team with EUR 250 mln AUM for a UK-sized country, EUR 1 bn for Europe and perhaps EUR 2 bn AUM to justify global scope. ‘Operating costs would be about on a par and the investor would boast control and transparency. But, at these levels, the team would be a generalist team – concentrating on the perceived mainstream – mainstream countries and mainstream sectors – and, inevitably, mainstream returns.’

Internos Real Investors is an owner-managed, independent and internationally active investment fund and asset management platform based in London. The company, which was founded by Jos Short and Thornton in 2008, also operates from Amsterdam and Luxemburg, as well as the central location of Frankfurt in Germany.

Copyright 2011 – PropertyEU [source]

On Chinese Ghost Towns and Property Bubbles

A lot has been written about the economic wonder that China is said to be. Said to be, indeed. Because continuous high GDP growth rates come at a price, in the modern-day command economy called China. In order to boost economic growth, the central government has commanded local governments to build. And build. And build. In the absence of sufficient demand or purchasing power this is leading to massive vacancy. A property bubble in the making, with unanticipated proportions and effects.

This short documentary shot by Dateline (Australian TV) presents a clear, yet disturbing picture of what’s going on in today’s Chinese property market. Ghost towns, vacant mega-malls and an estimated 64 milion (!) apartments waiting for occupants.

Vast new cities of apartments and shops are being built across China at a rate of ten a year, but they remain almost completely uninhabited ghost towns. It’s all part of the government’s efforts to keep the economy booming, and there are many people who would love to move in, but it’s simply too expensive for most. Video journalist Adrian Brown wanders through malls of vacant shops, and roads lined with empty apartment buildings… 64 million apartments are said to be empty across the country and one of the few shop owners says he once didn’t sell anything for four or five days.

Watch the documentary (14 minutes), below:

If you want to learn more on the South China Mall, the largest mall in the world, suffering some 99% vacancy, take a look at this documentary (POV Utopia). It is a bit … awkward.

Like this at Facebook!

Dog days are over

Back to were we started off with this blog: March 2009. We’ve set off while the economy was based on quicksand: banks, companies and consumers were suffering alike. Governments too, due to the necessity to bail out and to support the weak. And even countries have been taken to the cleaners. Take Greece and Ireland for example. Real estate markets have suffered substantially and have come down “back to basics“.

After that, the bottom of the market has been called. It took a while since then for prices to adjust to the new reality (after all, you can eat an elephant only bit by bit). And now, it seems dealflow is picking up after summer 2010, it seems like the dog days are over. That said, we should point out that current deals are mainly at institutional-sized volumes and between larger market participants.

Let’s see where current trend takes us. Today is the first day of the Expo Real Property Fair in Munich. We will keep you posted from there.

‘Nederland mooier door bouwstop’

Nederlandstalige lezers van dit blog maak ik graag attent op de werkgroep ‘Laten We Nederland Mooier Maken’ (LWNMM). Deze werkgroep, bestaande uit een divers gezelschap vastgoedondernemers, ventileert met enige regelmaat haar eigenzinnige maar zeer doortimmerde visie op de ruimtelijke ontwikkeling van Nederland. De denktank komt met heldere adviezen over de ontwikkeling van de gebouwde omgeving en het ruimtelijk beleid en speelt in op relevante marktontwikkelingen.

[My apologies to anglophone readers of this blog as this blogpost is in Dutch and it covers a typically Dutch subject]

De werkgroep ‘Laten we Nederland Mooier Maken’ is een denktank van ondernemers uit verschillende disciplines binnen de vastgoedsector. Vanuit een persoonlijke betrokkenheid en met professionele expertise wil deze werkgroep een brede discussie over ruimtelijke ontwikkelingen in Nederland op gang brengen.

In een recent artikel in de Volkskrant pleit de werkgroep voor een bouwstop, voor sloop en voor hergebruik van de bestaande gebouwvoorraad. Samen met het wegnemen van ‘perverse prikkels’ bij gemeenten om nieuwe grond uit te geven, is dit in de ogen van de werkgroep een veel duurzamere oplossing dan het nu zo sterk gestimuleerde ‘duurzaam bouwen’. Er is feitelijk geen schaarste. Sterker: door de sterk gestimuleerde bouwproductie is er sprake van enorme overcapaciteit van kantoor- en bedrijfsruimten waardoor met name oudere panden leeg staan. Ook de woningvoorraad is verouderd en sluit niet aan op de vraag. Door de bestaande voorraad te vernieuwen, te verbeteren en te hergebruiken, wordt dit probleem opgelost. Nieuwbouw is niet nodig als er al ruim voldoende ruimte beschikbaar is.

De achterliggende oorzaak is tweeledig: 1) aanpassen is duur en vergt veelal een afwaardering of een extra investering van gebouweigenaren; en 2) gemeenten hebben meer baat bij uitgifte van nieuwe grond dan bij herontwikkeling van bestaande gebouwen. Omdat gemeenten geld verdienen aan uitgifte van nieuwe grond, is dit een perverse prikkel in het gemeentelijke huishoudboekje:

Wethouders kijken vooral naar wat het beste is voor hun eigen begroting en hebben meestal geen gemeentegrensoverschrijdende visie. Grond verkopen is voor hen het meest lucratief. De concurrentie tussen gemeenten leidt tot een voortdurende overproductie van commercieel vastgoed. 

LWNMM legt hiermee de vinger op een van de zere plekken van het ruimtelijk vlek-op-vlek beleid. De werkgroep pleit voor een verbod op uitgifte van nieuwe grond en het flexibiliseren van bestaande bestemmingsplannen, zodat gebouwen eenvoudiger voor een andere functie kunnen worden omgebouwd.

Hoewel ik de aanbevelingen van de werkgroep LWNMM op dit punt van harte onderstreep, zou ik een nuancering willen toevoegen. Zoals ook in het citaat hierboven gemeld, doet de overproductie en daarmee de overcapaciteit en leegstand zich voornamelijk voor bij commercieel vastgoed: in het bijzonder kantoren en bedrijfsruimten. In de woningbouw is veeleer sprake van onderproductie en van wat ik ‘scheefbouw’ zou willen noemen: het aanbod van nieuw gebouwde woningen sluit in kwantitatieve èn in kwalitatieve zin niet aan bij de vraag. Hierbij spelen naast de hoge grondprijzen uiteraard meerdere beleidsfactoren een rol, zoals hypotheekrenteaftrek, het sociale huurstelsel en (hoge) overdrachtsbelasting. Déze elementen van het vlek-op-vlek beleid kunnen enkel worden uitgebannen door een geïntegreerde en gelijktijdige aanpak van het woningmarktbeleid. Ik hoop daarover in een volgende blog eens een boom over op te zetten.

De werkgroep ‘Laten We Nederland Mooier Maken’ heeft haar visie op het aangehaalde probleem van overcapaciteit en leegstand van commercieel vastgoed en hun aanbevelingen treffend in beeld gebracht in onderstaand filmpje. Hierin komen werkgroepleden Jacques Boeve, Ton van Oosten en Joris Deur aan het woord. Van harte aanbevolen.

Poll Results: Not out of the woods yet

Despite bottoming real estate markets, rallying stock markets, months of green shoots and some general optimism on the economy, many believe the misery in real property is still not over.

poll-results-awootwyOn last week’s poll ‘Are we out of the woods yet?’, more than half (56%) of the respondents voted ‘No, we are facing further hardship in property’. Another 30% voted ‘Not yet, but recovery is a matter of months’. Only 7% were of the opinion that property markets have hit bottom and we’re recovering. Other responses: 7%. Thanks to all respondents for taking the time to vote!

With just 27 responses, this surely is a limited survey. But because of the quite targeted, informed audience this blog attracts, I value the outcome. The outcome forced me to take another look at my own opinion of things. Have I become to positive too soon?

Will there be a second, maybe more severe, hit of the real estate markets? Have banks been covering too many clients for too long? Will demand prove to be too little, due to limited amount of capital, in order to clear the market at prevailing prices? Will prices drop even further? When will we finally see these really interesting investment opportunities come to the market, that we have all been waiting for? Hey, and how about tenants? Will they continue paying the rent, or request for another holiday? Is it the low interest rate that is keeping it all in one piece? And when is all this to change?

Please, let me hear your views on the subject.

Anyone can play guitar

Punk playing guitar.Allright, it is official now: real estate markets have been bottoming out. Few of them are on the uprise, many are to follow shortly.

Just take a look at a few headlines of the past couple of weeks:

 

 Speed of decline in property returns slows, says JLL

Time for investments is approaching, says King Sturge

Ross Goobey Memorial lecture hears of ‘green shoots’

F&C is launching an opportunity fund to take advantage of the repricing in the UK

Office property lettings are leading the way, according to Property Wire, also stating:

Euro commercial property transactions increase amid signs of optimism

Yields harden for the first time since the start of 2007

Are we out of the woods yet? If we are to believe investment agents and some market analysts, we are. But why should we be? Optimism is good alright, but it should be backed by some solid market evidence. That is still lacking, I think.

Consumer spending remains low, due to layoffs, deleveraging and economic uncertainty in general. As a result, occupier demand is still very low in most markets. Many businesses are (still) suffering. This puts pressure on rental values, hence on property values. Values which have been hit by yield shift earlier. I’ve discussed this second hit before. Most investorers don’t appreciate to swallow such losses and as long as they find banks on their sides who accept them breaking coventants (or don’t know what to do with the underlying assets…) real estate assets are not likely to be sold.

The major concern remains: financing. Although DTZ reports some growing confidence (report in Dutch) of property financiers, the confidence of real estate banks still remains low. Also, let’s be honest, we haven’t seen too many big transactions taking place this year. Nevertheless, rumours are that there are a few transactions in the pipeline, that may give the market some renewed confidence in the second half of this year. If these come about, in volumes and against promising yields, markets may indeed recover in due course.

Meanwhile: opportunities galore for all property investors wishing to cash in on in longer run. Prices are around their lows now. Awareness is key, now more than ever. You will have to do your homework, look at bricks & mortar again, assess the quality of the rental income and appreciate any upside you may encounter. Anyone can play guitar. But not everyone is a rock star…

Retail property most vulnerable to deleveraging?

stocks-sale-must-goWhen deleveraging continues, which will be the case, consumer spending will most likely drop. Hence, retail sales will drop too. How will continuing deleveraging affect consumer spending, retail sales and rental values of retail property? Consumer spending will be curbed, affecting retail sales quite dramatically, which will in turn put a burden on rental values. Retailers will suffer or collapse, leaving landlords with vacancies, rent unpaid and lower ERV (expected rental value) on their real estate. Prime pitch retail locations on our high streets will remain attractive; secondary locations will suffer the most from yield shifts and dropping ERVs. However, also prime location are likely to see some pressure on the rental values.

Where does this lead us? Retail property investments are more vulnerable to decreasing consumer spending than any other sector. On the short run (read: during the recession), prices will decline and it is likely that some properties become available for acquisition at quite attractive prices. On the long run, retail property and rental values are likely to rise again. Property investors with strong stomachs may want to benefit from the current summer sale.

Back to basics and looking for a new equilibrium

balanceSo, the crisis brought us back to basics. Two feet in the mud, looking for what really matters in real estate investing: a solid cash flow, or, as you may call it: the quality of the income stream. That is key, but we seem to have forgotten about rental values, ERV, or the tenant in the first place. For years, property investors (and financiers, for that matter) have been gazing at capital value growth and yield shifts, in the apparent total absence of reason and logic.

And now, back on earth, we are looking for a new balance. Looking for the right price for the amount of risk we are willing to take up. Easier said than done, now that the world is completely different than 12 months ago (is it really? yes, it is). Investors need to adjust to new market circumstances and conditions. Low interest rates, high risk of defaulting tenants, high vacancy risk, questionmarks at rental values and also still questionmarks at financing.

One of the results is that we see yield gaps widening to increasingly attractive levels. Over the past few weeks, I have seen some high level transactions taking place, in well-established markets like London, at net initial yields around 10 percent. I will list a few of them, shortly. Bearing in mind that lending has become cheap (nice loan, if you can get it…), the yield gap has increased dramatically.

Yield gap is nothing else than a risk premium. So it must be the case that the actual risk of investing in property is high then? No, it has little to do with actual risk, allthough liquidity risk is high. It is merely perceived risk. In other words: the market perceives such high levels of risk that (purchase) prices should drop in order to maintain the same level or risk adjusted return. That is plain and simple economic theory put into practice.

Shrewd investors tend to think in the longer run these days. For these investors, today is the time to buy. Buy property at 9 or 10 percent yields, collect and improve the rent, wait until the sub-5 days return and make a nice exit. That is also plain and simple economic theory: buy low, sell high. Not the other way around.

A quote from AEW’s Ric Lewis (in one of my earlier posts):

It’s interesting to know what the spot price is and I understand that banks want to know what it is today. But tomorrow the property may be worth a lot more and most big investors buy a property for a specific holding period.

So true. And interestingly enough, AEW is one of the acquiring investors these days. Not surprisingly, at yields of around 10 percent…