EXPO real 2009: Crisis? What crisis?

(c) Supertramp
(c) Supertramp

While last year’s edition of the Expo Real, just weeks after Lehman’s collapse, spelled doom and gloom over international commercial real estate, this year, most participants had ‘recovery’ and ‘opportunities’ written on their foreheads. Some for a good reason, some may be still in denial with regards to today’s market circumstances. Let me share some of my personal notes and findings on this year’s Expo Real, that took place in Munich on 5-7 October.

The exhibition has been down-sized quite a bit, as opposed to last year. This meant fewer visitors on a smaller space and still some voids and ‘hidden vacancies’. This actually worked out fine in terms of participants’ interaction and attendance: there was more time and space for having a discussion on content, market circumstances and the way to proceed. All-in-all, it was a good example of ‘back to basics’.

Now that some markets are recovering, many investors have been ‘restructuring’ their assets and capital, and the first opportunities arise, things look less pale and the tone at Expo Real was a bit “Crisis? What crisis?” Some investment agents were boasting on their recent transactions which, in their opinion, should provide clear evidence of market recovery. Transaction sizes are up and yields are going down again.

This is actually true, but I find it a bit too soon to be talking about a full market recovery. Yes, yields are shifting down again (prices up), but the investment market is likely to be hit by softening occupier demand in the months to come. Hence, rental levels will be falling, leaving the current buyers with (reversionary) yields that are simply too low. In other words: the market is overrented and therefore today’s transactions are still overpriced.

Many investors are not prepared to accept lower price levels, as long as they are not forced to. With interest base rates at historically low levels and banks willing to accept breaches of covenants as long as the debt service is being paid, investors will not be forced to sell. Many investors raised capital to strengten their financial basis to either repay on their debt or to build themselves a war chest.

I wouldn’t go so far as to call banks ignorant. However, fact is that only on the third day of the Expo Real, I found a real estate bank prepared to admit they have a problem in their portfolio. Many others stated: No, we don’t have a problem in our property finance portfolio; We have allways financed prudently and at low LTV levels; The majority of our loans is performing well and there is no need to take action. Frankly, I think this is bull shit and I truly hope that these utterings are only for external purposes and that internally these bank do work out hard on their real estate finance portfolios.

I was happy to find at least one bank prepared to admit they had a problem and they were facing it. They have set up an active workout strategy that they are implementing now. They are going ahead relentlessly, taking up the pain and swallow what needs to be swallowed. This is what every property financier should (be willing to) do. It is an Anglo Saxon method rather than a Rheinland one, but I strongly believe in its benefits for market recovery. Signs are, the UK is recovering first in Europe and I think this may be the most important reason for it.

That being said, I believe today’s market circumstances do offer opportunities for real estate investors. Not in the passive way it used to be (buy it blindfolded, gear up 80-90%, wait for yield shift), but in a more active, forward-thinking way (buy quality cash flows and locations, gear up prudently, manage actively). Real estate investing is by no means easy and the winners of tomorrow will have to do their homework. I did some of it in Munich and I liked what I saw.