UK CRE Now Off 45 Percent From The Peak.......

Could be worse if you are a foreign investor..... The British Pound is 20 percent off against all other major currencies over the past 12-18 months.....

Wenn man jetzt noch bedenkt das das britische Pfund gegenüber allen relevanten Währungen auf Jahressicht über 20% verloren hat sieht die Lage für ausländische Investoren noch düsterer aus...... Der Sektor der gewerblichen Immobilien dürfte schon sehr bald die Schlagzeilen mit spektakulären Pleiten dominieren..... Mich wundert das die in Deutschland dominierenden offenen Immobilienfonds ( etliche mit signifikanten UK Exposure siehe Chart Geographische Verteilung der Objekte In Offenen Immobilienfonds via FAZ/Scope ) trotz einer regelrechten Implosion im gesamten Sektor ( plus der teilweise drastische Währungseffekt in UK & Osteuropa ) querbeet über alle Regionen es noch immer schaffen keine Verluste auszuweisen...... Denke das spätestens wenn die Mieterneuerungen anstehen die ein oder andere Überraschung "droht".....

“Losses on UK commercial real estate could equal subprime” FT Alphaville BNP Paribas analysts are worried about the health of the UK’s commercial real estate sector. In a note released on Friday, they warned that a “combination of rising vacancy rates, falling rentals and extraordinarily difficult financing conditions will almost certainly drive UK CRE losses higher.”

Analysts Vivek Tawadey and Olivia Frieser contend that CRE is the “next leg of the credit story” in both the US and the UK, which they believe could see a major CMBS default.

From the note (any emphasis FT Alphaville’s):

Bonds backing CRE assets of a UK property investor (Simon Halabi) are likely to default on £1.15bn of debt. In this particular case, the values of the nine “prime” London office buildings (included the offices of JPM, the UK headquarters of Aviva, the Naval and Military Club amongst others) that were securitised have fallen from £1.8bn in November 2006 to £929mn as of 8 June, a reduction of almost 50%.

According to IFD, UK commercial properties values have been declining fast with peak to current declines of around 45%, with major declines noted in all major segments - retail, offices and industrials

At the same time the amount of available floor space for occupation increased at the fastest pace since 1999 in all regions with the exception of London (Chart 2) and thevalues of inducements rose at its fastest pace since the survey’s history in 1999. Collectively this implies that an upward correction in prices in the foreseeable future is unlikely.

> I would love to see a similar stat for Dubai ( see The Upcoming Skyscraper Tsunami..... )

> Ich würde liebend gerne eine ähnliche Statistik für den Markt in Dubai sehen ( siehe The Upcoming Skyscraper Tsunami..... )

Tawadey and Frieser also point to the refinancing risk ahead:

Around £43bn (or 19%) of all CRE loans comes due for repayment in 2009. A further 14% matures per year annually in 2010 and 2011 (Chart 3) or in excess of £100bn over the next 3 years, implying very significant refinancing risk inevitably leading to higher defaults.

The fact that only 10% of CRE loans are securitised in Europe (US: 30%), also underscores that more of these loans are held on bank books, leading to potential write-downs down the line.

S&P On US CMBS / CRE FT Alphaville

The agency wants CMBS credit enhancement levels sufficient for AAA-rated tranches to be able to withstand some pretty severe declines (40 to 50 per cent) in the value of commercial property.

> So it looks like 50 percent off is the new normal...... And watching the next graph ( HT Zero Hedge ! ) i´m not sure if this will be enough..... Needless to say that the Fed just a few weeks ago has proposed a CRE TALF program to buy tons of this crap ( No Kidding..... S&P Is Acting Responsible & Threatens To Blow Up Fed´s CRE Bailout Stunt Via TALF ). It will be fun to watch how they will go along with the collateral criteria..... They already have loosened it once ( see ( see Fed Bends Over Backward For CMSA, Will Feed Inflation Capacitor With More Toxic Garbage via Zero Hedge ). .....

> Sieht ganz so aus als wenn eine coole Halbierung vom Top in den ehemals heißgelaufenen Märkten eher die Regel als die Ausnahme ist....... Bin mir sicher das Banken in Ihrer bekanntermaßen vorausschauenden Weitsicht hierfür ausreichend "Vorsorge" getroffen haben..... Wenn man sich jetzt die nächste Grafik ( Dank an Zero Hedge ) ansieht dürfte klar werden was sich für ein Debakel zusammenbraut....... Möchte nur noch mal zur Belustigung darauf hinweisen das die Fed vor wenigen Wochen extra ein TALF Programm gestartet hat um für wahrscheinlich bis zu 100 Mrd $ den Giftmüll zu kaufen ( siehe No Kidding..... S&P Is Acting Responsible & Threatens To Blow Up Fed´s CRE Bailout Stunt Via TALF ) ...... Bin gespannt wie weit die Fed noch sinken kann....Bisher hat Sie bereits einmal die Bedingungen für die Sicherheiten gelockert ( siehe ( see Fed Bends Over Backward For CMSA, Will Feed Inflation Capacitor With More Toxic Garbage via Zero Hedge ).......

UPDATE :

Graph
European Top 20 From JPM’s CRE Risk List

( Note: Data from end of 2008! )

Abn Amro "won't Touch This", Comparison of UK and US housing markets / pdf

i disagree with the optimistic abn ambro view about the us houisng market. but i think they a correct view on the uk market. ugly!

ich stimme sicher nicht mit der zu optimistischen abn sichtweise in sachen us immobilienmarkt überien, baer ich denke das sie den uk markt extrem gut treffen. sieht übel aus!

thanks to "bobsta"

U can’t touch this
Dario keeps handing us sticks to beat him with. After telling us about his pink mountain bike last week, he recently revealed his most recent music purchase: MC Hammer. This makes his criticism of Rob’s musical tastes (the Pet Shop Boys and Abba) look pitiable. Obviously, this has very little to do with the subject of today’s Overnight Report, which focuses on the US and UK housing markets. Except that markets clearly believe it’s ‘Hammer time’ for US housing, while UK housing is ‘Too Legit to Quit’. But if you ask me, it’s UK homeowners who need to Pray’ (Perkins tells me these are MC Hammer song titles – we’ve hit a new low).

i can´t stand mc hammer so i´ve taken the "family guy" version :-)

Tim has outlined our view on the US housing market in previous Overnight Reports,so there’s little point in repeating the analysis. In short, we remain optimistic that the economy will prove resilient to problems in housing and the worst could already be behind us.

> very optimistic...i disagree

> extrem optimistisch. ich denke wir sehen gerade erst den anfang

Yet despite our upbeat view, we recognize why investors are concerned. If problems in sub-prime cause a broader credit crunch across the economy, we could end up looking pretty silly (a feeling familiar to some of us – Ed). Still, there seems to be an inconsistency here. Markets appear relatively relaxed about the UK housing market, which looks more vulnerable to a correction.

At this stage, I should probably clarify something. We don’t deny that US housing is overvalued. House prices will need to fall in real terms over the medium term. Yet given solid employment growth, rising incomes and – most importantly - unusually low long-term interest rates, it seems possible to rationalize where we are now.

>i think they left out speculation, excess, fraud, lax lending, creative financing ......

> denke die unterschlagen hier galanterweise spekulation, betrug, keine kreditstandtarts, kreative finanzierungsformen,......

In contrast, developments in the UK look harder to explain. Still, it hasn’t stopped some from trying. We are told the lack of spare land, rising immigration and demographic factors justify the premium on UK housing. But I’m yet to be convinced. These factors should boost prices and rents by a similar amount, as marginal buyers are forced into the rental market. Yet prices have risen far more quickly than rents over the last decade. The ratio of house prices to rents is now almost 50% higher than its long-run trend, compared with around 25% in the US. In fact, prices have risen so much faster than rents that rental yields are now below mortgage rates. In other words, property ‘investment’ is generating a negative cashflow. It’s only the expectation of further capital gains that is sustaining demand.

With house prices appearing more detached from fundamentals, the UK housing market could be more vulnerable to a correction than the US. There are also reasons to believe this could be more problematic for the wider economy. Owing to the lack of supply flexibility (economists call it an ‘inelastic’ supply curve), the burden of adjustment would fall on prices rather than quantities, the opposite to what we have seen in the US (see the illustration on page 2). This is how ‘spillover’ effects could occur. Falling house prices would depress household wealth and spending, especially as UK consumers hold a larger share of their wealth in housing than in the US. And given the concentration of default risk and sharper increases in household debt, the banking sector could also be exposed. While the latest RICS survey shows UK housing is still ‘Gaining Momentum’, we all know ‘This is the Way We Roll’: a housing market collapse will undermine confidence in sterling, preventing the Bank of England from cutting rates and prolonging the downturn.

It seems puzzling that markets worry about excesses in the US, but remain relatively unconcerned about the situation in the UK. The UK has experienced much sharper increases in house prices than nearly all other developed economies in recent years (Chart 1). Is this justified? We think not.

Numerous attempts have been made to rationalize the premium on UK housing. These arguments generally highlight the shortage of supply or a sustained increase in demand (due to immigration or demographics). Yet these trends arenot exclusive to the UK. The Netherlands and Japan have more acute land shortages, but have experienced less rapid increases in house prices

More significant, an increase in housing demand or shortage of supply should put upward pressure on rents, as well as on prices. Over the long-term, rents and house prices should grow in line with each other. Yet this has not been the case. Prices have risen much more rapidly than rents in recent years, suggesting UK housing is overvalued by nearly 50% compared with about 25% in the US (Chart 2).

Rather than fundamentals supporting the housing market, expectations of future gains and speculative activity seem to be driving prices higher. The level of rental yields is perhaps the clearest evidence of this. In the UK, rental yields have fallen below mortgage rates (Chart 3). This implies that housing ‘investment’ is generating a negative cashflow. With buy-to-let demand now accounting for 25% of all new mortgages, this illustrates how fragile demand could be to a shock to expectations.

This greater degree of overvaluation makes UK housing more vulnerable to acorrection than the US. It could also have more significant implications for the wider economy. Owing to the lack of land and inelastic supply, the burden of an adjustment would fall on prices rather than quantities. A given change in demand will generate a larger drop in prices (Chart 4). In regions where land is more abundant, such as the US, the adjustment primarily comes through quantities (i.e. construction output). A fall in UK house prices would depress household wealth, hurting consumer spending. It could also leave the banking sector exposed. If sterling then collapses, the Bank of England could find itself unable to respond.

lets hope abn is allowed to "stay" with their view after their takeover from the british barclays.......

bleibt zu hoffen das abn die selbe sichtweise auch nach der übernahme durch die britische barclays beibehalten "darf"

Those who piled into commercial property risk a shock / UK

a fantastic article. how big must the bell be that rings to see the obvious............. ? same could be said about many other asset classes......

ein fantastischer artikel. man fragt sich manchmal wirklich was passieren muß um zu erkennen das irgendetwas aus dem ruder gelaufen ist..... das gleiche gilt für einige andere asset klassen.....

thanks to ww and charlie the tram!

.....I have no need of transatlantic comparisons. The key question can be simply put: is the UK commercial property market a bubble waiting to burst?

The commercial property market is simply that owned by businesses. It includes, obviously, offices, shops, factories and warehouses.
So this is big stuff. Even so, you might think it a bit remote from the concerns of the average Joe. But you'd be wrong. Over the past few years not only have pension funds and other investors piled money into commercial property but also there have been large amounts coming in from private individuals. Commercial property has been a very hot sector indeed.

Over the past three years commercial property prices on average have increased by 11pc, 13pc and 13pc. They have doubled over the past 10 years. And this is an average. The most successful category, retail warehouses, has seen increases of almost 160pc.

For anyone familiar with financial markets in general, and this one in particular, these numbers seem to scream trouble. What goes up does not necessarily go down but what goes up that fast usually does. And this market has a history of booms and busts. Between 1980 and 1989, for example, commercial property prices almost doubled. Yet in the subsequent three years they fell by 30pc......

...., growth can only come from rising rents, falling gilt yields or further compression of the spread between gilt yields and commercial property.

The first is the best hope but even that isn't great. After all, the economy will probably carry on growing steadily but unspectacularly for the next few years. There is a fair amount of unused commercial property available and commercial construction has been high. It is unlikely that rents will rise by much more than 3pc on average over the next five years and in the absence of any change in yields that would also give you an average annual capital gain of 3pc.

And on the yields it really is difficult to see where help could possibly come from. Lower gilt yields? They are already extremely low. Indeed, given that interest rates may have to rise further it is more likely that gilt yields will rise over coming months.

As for the spread over gilts, it is already negative, that is to say, investors get less of an income return from commercial property than they do from gilts - despite the much greater risks. Sheer weight of money might drive the spread even more negative in the coming months but that surely cannot last.

>compare this to the latest data from germany. yields on the bunds are close to 4%. no wonder that uk investors are dominating the german market ( foreigners bought 75%! of 2006 volume) http://tinyurl.com/2sk7qy

>vergleicht das mit deutschland. die bunds rentieren knapp bei 4%. kein wunder das die ausländer und besonders investoren aus uk das geschehen hier dominieren.

So what I see is a petering out of the boom in commercial property but no bust, at least as long as values are not carried much higher than they currently are.

Am I uneasy about this view? You bet. Markets do not usually produce a fantastic run of rising prices followed by a gentle descent to equilibrium, maintained as far as the eye can see.

The end of the good times usually brings some sort of nasty shock, not least because the final phases of the boom bring in dodgier investors, more heavily exposed and taking more risks.

Moreover, what has happened in this case has been classic investment market behaviour.

Investors are supposed to look forward but, since the future is so uncertain whereas the past is known, what most investors do in fact is to look back - and assume that the future will be like the past.
So when commercial property was in the doldrums they weren't interested, even though the yield was extraordinarily high. Then after a few years of amazing capital gains commercial property came to be regarded as an asset whose prices regularly rise by 10-12pc per annum.

So just as the theoretical, rational, forward-looking investor should have been becoming less enthusiastic, so the sentiment-driven, backward-looking, actual investor was becoming more enthusiastic. Ring a bell?

>big enough / groß genug?

Although some aspects of this story are property market specific, many are not. All those investors who think they have been geniuses for investing in this super asset class have in fact been taking part in the worldwide increase in risk appetite which has seen everything from real estate to emerging market equities to fine art and fine wine increase sharply in value.

As I have pointed out many times in this column, these dramatic increases have at their root the easy credit conditions that have prevailed for many years but which central banks have been withdrawing little by little.

>chart from british land (nr. 1 in uk and 2nd biggest in europe)

...This may not be a bubble as such, but I will tell you something: commercial property used to be regarded as risky but now investors seem to think that it is safe. They could be in for a shock.

disclosure: short us reits

British Land warns property boom (may) be over

when the 2nd. biggest property company in europe speaks you better should listen. and it looks like times are getting tougher..... can´t wait fro the blackstone bid with a big premium.....:-)

here is the official press release (PDF) http://www.britishland.com/images/pressrelease130207.pdf

and when you read the stories under the label for uk and london you can guess that the peak is passed or at least very close.

wenn die zweitgrößte immobiliengesellschaft in europa spricht sollte man die worte besser ernst nehmen. und es sieht in der tat so aus als wenn die zeiten eher schlechter werden. ....kann kaum das blackstoneangebot inkl. satter prämie abwarten.......:-)

und wenn ihr euch die diversen geschichten unter den labeln zu uk und london durchlest kommt man zu dem gefühl das es wirklich nur noch gen süden gehen kann.

Net asset value, used to gauge the performance of U.K. real estate companies, dropped 0.9 percent to 1,610 pence at Dec. 31, the end of British Land's fiscal third quarter, the London-based company said today in a statement. Lehman Brothers had forecast 1,636 pence.

Central London offices are the best-performing type of U.K. commercial real estate. Offices in the West End, the most expensive in the world, returned 32 percent last year, compared with 18 percent for all U.K. commercial real estate, IPD said Feb. 1.

from the release: think you need to read between the lines.../zwischen den zeilen lesen...)

"Real estate markets are difficult to call at present.

The fundamentals remain strong. A healthy
economy, strong employment and a central bank determined to combat inflationary pressures are a good recipe for our business. ( just the same you can read in 99% of all press releases / das dürfte man in 99% aller veröffentlichungen lesen)

It means rental growth is available to boost returns. Solid asset backing and long-term dependable cash flows support property yields and give the prospect of total returns comparing fairly to bonds and equities on a risk adjusted basis.

On a sectoral view, expansion of London’s service industries and national consumer spending in positive territory underpin our customers’ ability to expand in the best space – which British Land is well placed to offer......

Thankfully, British Land remains positioned to produce growth and attractive returns in the more demanding markets in prospect. Our asset values are well supported – perhaps even conservative in places – and rental growth prospects are good.

Stephen Hester, chief executive, said: “2006 saw further property yield reductions, now twinned with a modest rise in bond yields to underline our own view that the property investment case can no longer rely on further positive yield shift.”....

Equally, those parts of the property market where price appreciationhas gone further than the fundamentals of customer demand and risk assessment support, maydisappoint some investors."

The portfolio focuses on areas where the principles of supply and demand are strong over the long term. Some 47% is invested in out of town retail properties, including Meadowhall Shopping Centre (one of only six regional shopping centres in the UK), 128 retail warehouses and 71 Superstores. A further 34% is invested in Central London offices and office developments, including Broadgate (the premier City office estate).



Key Facts
Value £15.9 billion Wholly owned portfolio
£13.4 billion Share of Joint Ventures and
Funds £2.5 billion
Annualised net rents: £643