“The terrible performance of the Japanese equity market over the past 20 years is well known,” says The Economist’s Buttonwood column. “It is easy to forget that property prices have suffered almost as much.” Japanese land prices are 58.5% below their 1991 peak and commercial property prices are 73% down from their highs. Does the same fate await property investors worldwide in this crash?
After losing heavily in the dotcom crash, many institutional investors moved money into commercial property, believing that it would diversify their portfolios and reduce their risk. For several years, this bet paid off handsomely. The strong global economy and cheap finance pushed up both rents and capital values. But when the global recession hit, commercial property unravelled along with most other assets.
Prices have slumped; the landmark John Hancock Tower in Boston, which was valued at $1.3bn in 2006, sold for just $660m. American commercial property indices have declined by 30% already and could fall as much as 50% before the crisis is over, says Ray Torto, chief economist of property services firm CB Richard Ellis on ABC.net.au.
The worst of the fallout is yet to come. “The albatross around the neck of the commercial real estate industry is the refinancing debt.” Many deals will need to be refinanced over the next few years, yet the value of the property is currently far below the value of the debt outstanding on them, meaning many borrowers may be unable to roll over their loans and will go into default.
This will pose a huge problem for the US banking industry, already shattered from enormous losses from the residential property bust; many mid-sized regional banks that largely avoided damage in that bust are exposed to commercial property.
But while America is especially hard-hit, the bust is a global problem, says The Economist. France and Germany have seen only modest declines in rents and prices, but in Spain and Ireland “vacancies are surging, property prices are plummeting and cranes are standing idle”.
Rents in Moscow are down 63% and one-fifth of space is empty. In Asia, business centres such as Singapore, Hong Kong, Mumbai and Shanghai have seen rents fall 30%-50% – and with plenty of new space coming on stream in many cities over the next few years, a quick rebound looks unlikely.
Investors are feeling the pinch almost everywhere, despite record low interest rates, reports the Royal Institution of Chartered Surveyors. More than three-quarters of the 27 countries in its quarterly survey reported a rise in distressed sales.
There are a few positive signs in some markets, such as Hong Kong, where property giant Hysan Development reported better rental income in its latest results. In Britain, “transactions now seem to have found a floor”, says Kelvin Davidson of Capital Economics; after plunging from a peak of around £6bn per month in late 2007, they’ve stabilised, albeit at a historically low £1.4bn per month.
Last month, supermarket Tesco and property trust Land Securities both managed to issue commercial mortgage backed securities (bonds secured against the cash flows from properties), the first such deals since 2007 in the US or Europe. But investors should not get too excited yet, says The Economist: as Japan can testify, downturns in this market tend to “last for years rather than months”.