Introduction
This report covers real estate around the world, looking at the residential sector as well as the market for commercial property.
Major Industry Trends
Residential Markets
Housing Markets Collapse Around the World
Prior to the collapse of the US housing market in 2007 and 2008, which indirectly caused the global financial crisis, some analysts had been warning for years that residential real-estate markets around the world had become overinflated. In June 2005, for example, The Economist warned of “the danger of a house-price collapse.” However, even The Economist has admitted that it did not foresee that plummeting real-estate prices would rock the global financial system to its foundations, and ignite fears that the world could be heading into an economic downturn to match the Great Depression.
In its issue dated June 16, 2005, the magazine said: “We have been warning for some time that the price of housing was rising at an alarming rate all around the globe, including in America,” adding that “the day of reckoning is closer at hand.” Presciently, The Economist forecast: “It is not going to be pretty. How the current housing boom ends could decide the course of the entire world economy over the next few years. This boom is unprecedented in terms of both the number of countries involved, and the record size of house-price gains. Measured by the increase in asset values over the past five years, the global housing boom is the biggest financial bubble in history. The bigger the boom, the bigger the eventual bust.”
It is certainly true that the real-estate bubble was a global phenomenon, linked by one common factor: cheap credit on lax terms. This was partly linked to the deregulation of financial markets around the globe, which helped to fuel the supply of credit, poor regulation among the relevant financial authorities in one country after another, and low interest rates, reflecting apparently subdued inflationary pressures during the latter part of the 1990s and the first half of this decade.
The party began to draw to a close in 2006 and 2007 as commodity prices spiked upwards, causing central banks around the world to hike interest rates. Countries with heavily indebted households were particularly vulnerable to the increase in interest rates. In addition, following the long boom, house prices had become stretched in many countries, with many would-be buyers simply unable to afford to enter the market. Finally, poor regulatory and banking practices in the US and other markets led to reckless lending by mortgage providers, which, when these unsound loans began to go bad, caused the financial crisis, and the credit crisis. Banks simply stopped lending to each other, as well as to individuals and corporations. This had a direct impact on the housing market, in that many people had great difficulty in remortgaging when their previous deals expired, or else were only able to do so on onerous terms. Furthermore, the drying up of liquidity in the overall economy caused unemployment to rise, which contributed to an increase in defaults on home loans, and discouraged new buyers from entering the market. (Nobody wants to take on a huge commitment such as a home loan if they fear for their job prospects).
Commercial Markets
The weakness of the global economy has inevitably affected demand for commercial property. Declining demand for office, retail, and factory space has hit occupancy rates and rental income across the planet. In the US, the problem is particularly severe. Indeed, according to the Wall Street Journal (March 26, 2009), “commercial real-estate loans are going sour at an accelerating pace, threatening to cause tens of billions of dollars in losses to banks already hurt by the housing downturn.”
The newspaper added that “commercial real-estate debt is potentially more dangerous to the financial system than debt classes such as credit cards and student loans because of its size.” It quoted figures from the Real Estate Roundtable, a trade group, that put the value of commercial real estate in the US at US$6.5 trillion, of which US$3.1 trillion is financed by debt. The newspaper also quoted Foresight Analytics of California, which estimates that the US banking sector could suffer as much as US$250 billion in commercial real-estate losses during the current recession. The research firm has predicted that more than 700 banks in the USA could fail as a result of their exposure to commercial real estate.
However, the problem is certainly not confined to the US. Jones Lang LaSalle, a global real-estate services firm, said in a report published in February 2009 (“Global market perspective,” see More Info) that further weakness in the global economy had accelerated the decline in commercial-property asset values. It said that Asian markets such as Singapore and many Chinese and Indian cities were suffering from oversupply, and that the problem was particularly acute in Beijing, where around 40 million square feet of office space would come onto the market over the next five years. In Delhi, a similar volume of supply will be delivered over the next three years.
Jones Lang LaSalle added: “Efforts to raise capital for listed property groups in Australia, Singapore and Japan are accelerating at discounts of 40–50% of the current share price, compared with discounts of 10–15% just months earlier. From London to New York to Tokyo, prices for office buildings in central business districts have fallen anywhere from 30% to nearly 50%. In the United States, sellers need to entice unlevered buyers with internal rates of return of 13–16%. The value that buyers place on vacant US properties is virtually zero. The value of empty retail space in the UK also has plummeted.”
Furthermore, Jones Lang LaSalle said that while credit conditions are showing some improvements, commercial real-estate lending largely is not. The firm added: “Although banks have received massive government aid, their commercial real-estate lending remains frozen amid uncertainty about nationalization and capital preservation for further loan losses. Banks are still absorbing government credit infusions rather than making significant new loans.”
In its March 2009 report “Global market perspective,” Jones Lang LaSalle said a global property-market recovery had yet to take hold. It added: “The debt markets remain congested, and the securitization market is at a complete standstill. Restored liquidity will reset property values through asset trades that provide accurate data points on pricing floors across the globe. There are few completed transactions to analyze, which suggests the bottom of the market is still ahead and values have further to fall.”
Jones Lang LaSalle concluded: “Going forward, investors likely will emphasize covenant strength, local market conditions and a deeper understanding of the outlook for specific industry sectors. For investors, 2009 will bring a return to core global markets as they look to maintain liquidity in their portfolios, and transact in markets with high levels of yield transparency and lower macroeconomic risks. For corporate occupiers, the short-term game is one of survival, and the continuous re-evaluation of property portfolios, rents, leases, and space occupation to accommodate reduced headcounts. Apart from those corporate occupiers who are currently cash-rich, more opportunistic tenant behavior will remain muted until the early part of 2010 at the earliest.”
Market Analysis
Price Falls Seen in Residential Markets Around the World
The extent of the declines seen in many economies is unprecedented. In the UK, house prices fell by a record 10.3% in the year to March 2009, according to property-data company, Hometrack. Richard Donnell, Hometrack’s director of research, also predicted that, “with the expectation of continued increases in unemployment and weak economic growth, together with restricted availability of mortgages, it seems doubtful whether the increase in activity and sales will continue to gather momentum in the coming months.” Other organizations have said that the decline in house prices in the UK has been even larger. The Land Registry, a government body that records data related to the housing market, said that house prices fell by 2% in February 2009 alone, pushing the annual rate of decline from 15.1% to 16.5%. Numis Securities, a City investment bank, warned in March 2009 that prices in the UK could fall by a further 40–55%.
Dubai’s once-booming property sector, which boasts an indoor ski slope and the world’s tallest building, has also crashed as a result of the global financial crisis. Developers have slowed or canceled projects, and thousands of jobs have been axed. In March 2009, the Reuters news agency quoted the Egyptian investment bank, EFG Hermes, as saying that house prices in the emirate had fallen by 34% on average from their peaks in 2008, and that they could fall by a further 20% in 2009. The investment bank said that prices should stabilize during the first half of 2010, and may rise in the second half of 2010 or early 2011.
Even in China, where the economy has continued to grow despite the global financial crisis, house prices have fallen. According to figures from a government body, the National Development and Reform Commission, house prices in 70 Chinese cities fell by 1.2% in the year ending February 2009—the biggest drop since records began in 2005. The price falls are unlikely to have come as a surprise to Ling Xiuli, a senior researcher with PICC Asset Management Company Ltd. In September 2008, she was reported to have warned that “house prices in big and medium-sized cities may collapse at any time,” and that they could continue to fall for a further 10 years. Ling said that “the house-price-to-income ratio in China is unprecedentedly high in world economic history, and the housing price bubble has hit its peak.”
The Canadian financial system avoided the toxic instruments that brought banks across the border in the US to their knees, and the country’s banks followed much more responsible lending practices. Indeed, Canada’s banks are regarded as among the healthiest among the advanced economies. Unlike the US, Canada also has a very low debt burden, and the government has posted big fiscal surpluses in recent years. Yet Canada, too, is suffering from falling house prices. In January 2009, Canadian home prices fell by 2.4% from a year earlier. The Teranet-National Bank National Composite House Price Index, which measures the rate of change of prices for single-family homes in six metropolitan areas, also showed that prices had fallen by 5.5% nationally from the peak hit in August 2008. The Reuters news agency said that confidence in the Canadian housing market had fallen due to the global financial crisis and the economic downturn. It added that housing activity, including resales and groundbreakings, is generally seeing a period of softness in Canada, although there has not been the same plunge in the sector that has been seen in the US.
Home sales in the US, the epicenter of the global credit crunch, have been falling since 2005, and prices peaked in 2006. The S&P/Case-Shiller home-price index of 20 metropolitan cities, one of the most respected measures of house prices in the US, declined by a record 18.5% in December 2008 from a year earlier. However, signs of hope have emerged in 2009. Sales of previously owned homes unexpectedly increased in February 2009, as low prices lured first-time buyers back into the market. Meanwhile, the Federal Housing Finance Agency reported in March that home prices increased by 1.7% in January from the previous month, the first increase seen in 10 months. Admittedly, the government noted that sales in January were “relatively low,” which could have affected the data. However, US housing starts and permits also staged an unexpected rebound in February from 50-year lows, easily beating forecasts.
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