The impact of the credit crunch has been far-reaching, with global property markets left severely damaged. What started off as a largely isolated problem of the US sub-prime mortgage market and some structured credit intensified and spread across the globe over the course of 2008. The repercussions will continue to impede business and thwart growth in property throughout 2009.
In the first half of 2008, global direct real estate investment fell 42% from record levels set in 2007, according to research from Jones Lang LaSalle. At $233 billion, these volumes were almost back to levels last seen in the first half of 2005. The Americas appear to be the hardest-hit region. Transaction volumes there dropped 56% from first-half 2007 levels to $75 billion. In Europe there were $106 billion-worth of transactions in the first half of 2008, down 38% on the same period in 2007. Asia-Pacific maintained its strength for the first six months of 2008, with volumes at $52 billion, down 5% on 2007 levels.
"What I see is a marketplace that changes every day," says Tony Horrell, head of European capital markets at JLL in London. "As far as we see there are no markets unaffected by what’s happening in the world."
| "Consumer confidence levels, which are a good barometer for the economy, are very low. People are worried about employment and this is having a detrimental effect on the property market" Philip Cropper, CB Richard Ellis |
Compared with a year ago, much less debt is available and commercial mortgage-backed conduits are gone. Any debt on offer comes at a much higher price than 12 months ago, even though interest rates have come down. Banks are charging higher fees and deals are more conservatively leveraged. There are fewer transactions and even fewer large transactions. Investors are on the sidelines waiting for prices to change. "Investment volumes are down significantly across every sector and every market," says Philip Cropper, an executive director at CB Richard Ellis. "That position will not suddenly change. The final quarter is likely to be worse. Markets are volatile, so we won’t see a lot of activity."
Particularly in the UK and the US the overwhelming consensus is: why invest today when you can buy cheaper tomorrow? Especially in the US, vendors have not even started to reprice assets to levels at which buyers are happy to come back to the market.
"In the US, real estate generally has a higher proportion of the debt in the capital structure and the industry needs to deleverage," says JLL’s Horrell. "The question is where will the market drop to? What is the price where people will buy?"
Repricing assets might not be enough to entice buyers. Cropper points out that the impact of the recession has not yet been revealed. There will be more credit risk in property as the occupational market is starting to weaken and businesses find trading conditions more difficult and require less space. That could mean property values have much further to go down than experts expect at present.
The first signs of a distressed market have been noticed in the UK where most of the commercial holdings are under stress. Loan-to-value ratio covenants have been breached and there is pressure on interest cover ratio covenants. It won’t take too much more pressure to see ICRs wiped out.
"Banks have a dilemma because debt is being serviced but LTV covenants are breached," says Horrell. "Some institutions are getting tough on borrowers."
Under-pressure banks are now starting to look at recovery and workout programmes on their loan portfolios. For the time being, UK banks are concentrating on their residential developer clients. The commercial sector has been somewhat more resilient but as banks seek to clean up their books and recycle capital they will be forced to look more closely at commercial property loans. This trend could extend into Germany and Spain.
Asia-Pacific, and southeast Asia in particular, is one region where property remained buoyant in the first half of this year. Singapore has been singled out by investors, and investment there was up 20% on the first half of 2007, totalling $4.8 billion. China also enjoyed modest success. Investments there were up 3% in the first half. However, as the global economic crisis has worsened over the past few months, Asia-Pacific too has come under pressure, leading to a marked slowdown in property.
The next 12 months will be gloomy. While the market slowed down as 2008 progressed, property prices are approaching fair value. As long as there is price movement and things get cheaper, volume levels will be maintained in the market, but it still will be difficult to finance large transactions.
"Confidence has been bashed," says CBRE’s Cropper. "Consumer confidence levels, which are a good barometer for the economy, are very low. People are worried about employment and this is having a detrimental effect on the property market."