Foreclosure Rates Effects on Retail Sales

							                    listed: outlook



                    Turning the corner
                                                                                                                                                                      valuation levels hit rock bot-
                    A crisis of confidence in financial markets and                                                                                                   tom and strategic investors
                                                                                                                                                                      – lured by long-term buying
                    a painful delevering is wreaking havoc on asset                                                                                                   opportunities – resume buying.
                                                                                                                                                                        A prerequisite of increased
                    valuations. Todd Briddell looks beyond the                                                                                                        transactional activity will be
                                                                                                                                                                      the re-emergence of real estate
                    headlines and highlights five turning points that                                                                                                 lending at reasonable levels of
                                                                                                                                                                      leverage. Currently we are in
                    will signal a recovery for listed property markets                                                                                                a situation in which the capital
                                                                                                                                                                      stack is inverted – that is to say,
                                                                                                                                             Todd Briddell is
                                                                                                                                             managing director        debt, with a stronger claim to




                    N
                                                                                                                                             and chief investment     the assets of a company or a
                                ot since the 1930s have we seen such an                                                                      officer at Urdang        property, is priced more dearly
                                implosion of the financial markets and                                                                                                than equity. This is partly
                                destruction of confidence, the impact of                                                                    driven by liquidity concerns in markets such as those
                                which will hit every corner of the world                                                                    for commercial mortgage-backed securities (CMBS).
                                and last for years. Beyond the cataclysmic                                                                  Once this pricing reverts to reflect the underlying
                    decline in financials, this crisis in confidence has                                                                    risk/return profile more properly, then capital avail-
                    spread to the real economy as witnessed by rising                                                                       ability, most importantly real estate lending, will
                    unemployment, high foreclosure rates, weak retail                                                                       start to return to a level of normalcy.
                    sales, and feeble demand for housing.                                                                                     Recently, we have seen more coordinated efforts
                      Of equal importance, investor psychology has                                                                          from the central banks to stimulate the economy and
                    shifted to risk avoidance at any cost, as evidenced                                                                     attempt to jump-start lending through continued
                    by recent trading of US Treasury securities at a 0%                                                                     liquidity injections as well as significant rate cuts. In
                    yield. As a result, credit has evaporated practically                                                                   addition, many governments have announced fiscal
                    overnight and this phenomenon has thrown the world                                                                      measures to pull their economies out of the global
                    into a painful delevering process.                                                                                      recessionary environment. Although we are encour-
                      Such a process is difficult at the best of times                                                                      aged by the coordinated actions of both governments
                    and torturous in a market starved of risk-taking capi-                                                                  and central banks to restore liquidity to markets,
                    tal. From households and hedge funds to                                                                                 support the global financial system and respond
                    corporate board rooms, the ugly process of delever-                                                                     promptly to negative economic indicators, the effec-
                    ing has begun in earnest and has driven up the volume                                                                   tiveness of these policy shifts will not likely be appar-
                    of foreclosures, capital call-induced liquidations and                                                                  ent until well into 2009.
                    auctions of illiquid private-equity positions.                                                                            Unemployment figures are one of the most reliable
                      To clear the market’s growing supply of liquidating                                                                   leading indicators of the direction of the economy.
                    assets, financial asset prices have fallen dramatically.                                                                We are now seeing the lack of credit availability and
                    Unfortunately, the effect of falling prices induces                                                                     liquidity manifesting itself in cutbacks in corporate
                    even more capital calls in a vicious cycle that has                                                                     spending and resulting in headcount reductions
                    prompted widespread criticism of mark-to-market                                                                         across all industries. Layoffs have continued to
                    accounting requirements.                                                                                                mount, shown most recently in US unemployment
                      For businesses and banking institutions on the                                                                        figures. In November, 533,000 Americans lost their
                    precipice, most are in survival mode and hoarding                                                                       jobs, the worst figure since December 1974. In all,


                                                                                 t
                    cash to stay afloat and/or maintain regulated capital              he complexity of today’s financial instruments       more than 1,250,000 Americans lost their jobs in the
                    requirements. Fortunately, central bankers around                  will forestall a quick recovery. Securitised loan    three months from September to November, mak-
                    the world have moved with unprecedented speed to                   pools with multiple risk tranches and complex,       ing a total job loss for the first 11 months of 2008 of
                    inject liquidity and compel institutions to restore          untested governance rules are widely referred to           around two million. UK unemployment is at 10-year
                    credit relationships. However, it remains unclear            today as toxic assets. Initially, these assets were tar-   highs, approaching two million. Any improvement
                    just how far the delevering process will have to go to       geted by the US Federal Reserve as the focus of its        in job creation statistics is some way off, but will be a
                    restore confidence.                                          Troubled Asset Relief Program (TARP). However,             leading indicator of a return of corporate confidence,
                      The credit market meltdown and global recession            the speed of the credit market meltdown did not leave      which should lead to a recovery in real estate per-
                    have had negative effects on commercial real estate          much time for the Fed to underwrite the complex loan       formance.
                    valuations, which are a function of net operating            pools. And despite severe criticism for what appeared        While the circumstances leading up to the crisis in
                    income (NOI) and capitalisation rates. Occupancy             to be a bait-and-switch approach, the Fed, along with      confidence in the 1930s are different from those that
                    and rental rates are expected to decline and push            central bankers in the UK, Europe, and Asia, opted         we face today, the fundamental need to have confi-
                    down NOI from historically high levels. However, in          to inject capital directly into the largest financial      dence in the system is identical.
                    the current capital market crisis, the rise in capitalisa-   institutions.                                                A recovery in confidence can only begin with a
                    tion rates demanded by private and public real estate          While there is less of an urgent need to resolve toxic   delevering process. Unfortunately, this delever-
                    investors is having a far greater impact on commer-          assets, there remains an enormous requirement to           ing process is wreaking havoc with financial asset
                    cial real estate valuations.                                 replace the capital that was provided through these        valuations and has created risk-avoidance behav-
                      The rapid worldwide sell-off of listed real estate         complex, securitised loan pools. To restore investor       iour that has disrupted the supply of capital and
                    investment trusts (REITs) and property companies             confidence, the credit rating agencies and loan origi-     spawned a global recession. It is unclear how long
                    provides strong evidence that the crisis in global           nators must align their interests with investors, pro-     or deep this delevering process will be to restore
                    capital markets is having a far greater impact on valu-      vide greater transparency, and structure the securities    investor confidence.
                    ations than the health of any local economy. To this         with less complexity.                                        While valuations of listed property companies are
                    end, we believe that any material recovery in listed           At the time, many saw Warren Buffett’s announce-         incredibly compelling based on reasonable worst
                    property share prices will be led first by a recovery in     ment that he would invest in embattled General Elec-       case scenarios of the future, we recognise that many
                    said capital markets.                                        tric and Goldman Sachs as a potential catalyst for a       investors will not be comfortable until they have
                      Although this might seem an obvious point, it is           market recovery. However, any positive outcome was         a higher level of visibility as to a bottoming out of
                    important to understand that a revaluation of com-           quickly overtaken by subsequent continued negative         the market. Once the financial markets regain their
                    mercial real estate to the upside could happen far           headlines. Nonetheless, a critical element of a recov-     composure, we believe institutional investors will
                    earlier than a recovery in slow-moving fundamen-             ery in confidence will be the announcement of land-        once again be drawn to the liquidity, transparency
                    tals, including supply, demand, occupancy, and               mark deals backed by “smart money”. Ultimately,            and diversification offered by the global real estate
                    rental rates.                                                today’s fears will only begin to dissipate when asset      securities market.




            44 ■ iPe real estate

RE J-F 09 Listed Urdang.indd 42                                                                                                                                                                  9/1/09 15:45:49