Friday, Dec 21, 2007
"Nightmare for investors is commecial property funds.
Guardian: The nightmare: locked inside as the walls cave in
Could this be a run on the property funds? Well it looks like it could be. Commercial property looks like we are heading for meltdown.
Posted by doomberger @ 08:46 AM (1404 views) Add Comment
19 Comments
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1. it_is_going_with_a_bang said...
"We continue to believe that a property crash is unlikely. Occupier markets are robust, with rental growth in all sectors."
Everyone is running for the hills and yet a crash is unlikely .... 'Unlikely' is such a great word - meanning they can change their stance at any time.
"Returns may be disappointing in the very near term."
Even more disappointing if you're run allowed to take your money and run!
2. it_is_going_with_a_bang said...
replace that first run with a NOT !
3. inbreda said...
"the cash buffer had fallen to 5% following a wave of redemptions,"
The clever money has left the building. Only the suckers remain.
This shows a general change in attitude that is going to be worsened by locking people in. The wave of panic this might set off across similar funds will cut the property purchasing power of these funds. Game over.
4. tyrellcorporation said...
I agree Inbreda. There will be a wave of panic selling now, much like queueing depositors at NR. Herd mentality working the other way now - game over, as you say.
5. Darren said...
Wasn't it the case in the 80's that the crash happened in Commercial Property then Residential. It is happening very fast this time around and it has been kept under wraps to avoid any panic. Looks like the whole thing is unravelling quite nicely.
6. This comment has been removed as it was found to be in breach of our Blog Policies.
7. cornishman said...
The central banks are pumping massive amounts of 'pretend' money into the system at the moment, which we are told is increasing the money supply and so will lead to inflation. BUT the banks are 'writing off' massive amounts of money too.
Does anyone on here know if the result is a nett increase or a decrease in the money supply?
Knowing the answer would make a big difference to how best to ride out the coming mess...
8. This comment has been removed as it was found to be in breach of our Blog Policies.
9. renting2 said...
The banks are writing off money as the underlying promises won't be met, the central banks are putting money in where a promise has not been made at all.
I would question whether the latter really can replace the former.
10. talking rot said...
The link between commercial property and residential property is tenuous - and certainly not direct. Perhaps this is a sign of the future direction of the economy rather then a forecast for the future of residential property.
11. paul said...
"Perhaps this is a sign of the future direction of the economy rather then a forecast for the future of residential property."
Yes, I'm sure everything with the residential property market will be just fine. No really.
12. jack c said...
There is a distinction between commercial property funds (bricks & mortar funds) Property Shares and residential property however in my experience the public will simply bracket all types as one and thus if commercial property falls in value they simply see it as “property values falling”.
Whilst many would argue that there is no direct correlation between commercial and residential property they had a very interesting feature on BBC working lunch recently where they plotted on a graph the ups and downs of commercial property over the past 10 years – strangely enough any downturn in commercial property was more or less followed by a downturn in residential property with roughly a 6 month time lag. Lets see if the same thing happens this time around
13. Say_it_isnt_so said...
talking rot said...
"The link between commercial property and residential property is tenuous - and certainly not direct. Perhaps this is a sign of the future direction of the economy rather then a forecast for the future of residential property."
Yes - no link at all - turn all the office blocks into residential flats and all will be well
14. Monkeyman1974 said...
this demonstrates neatly that sort term capital structures do not meet longer term investments. Most of these unit trusts, REITs, PropCo's etc purchase with 5 year business plans + in mind. A problem with holding cash to meet redemptions is that you lose the diversification benefits (and also you pay much larger fees than a cash fund) where commercial property forms only a very small (5% or so) part of your investment basket, typically through your pension, but also through your life insurance.
The occupier market is relatively robust for offices and industrial, less so for retail; but there is still a reverse yield gap (libor + margin (typically funding off 5 year swaps) > net rental yields) so without equity investors (not much of that around) the current pricing is still not sustainable. Many in the industry is hoping for a short sharp shock, and I think has a slightly more grown up attitude to prices going down than your typical BTL private.
15. confused76 said...
"Every year from 2003 to 2006 they gave investors annual returns of 17-18%, easily outstripping the gains from bond or equity funds and with seemingly little risk or volatility. They were invested in bricks and mortar offices with blue chip tenants, many on upward-only rent reviews. What could go wrong?"
It is almost Christmas, let me not bore you to death with a "capital market" explanation about "what could go wrong" and indeed went wrong with these illiquid assets (pardon... Ponzi schemes)
Let me just blast in a joyful laughter to mark the Season
AHA HAHHAHAH AHHAHHAH HHAHHAHHAHAHHAHAHAHHAHA
AHA HAHHAHAH AHHAHHAH HHAHHAHHAHAHHAHAHAHHAHA
AHA HAHHAHAH AHHAHHAH HHAHHAHHAHAHHAHAHAHHAHA
AHA HAHHAHAH AHHAHHAH HHAHHAHHAHAHHAHAHAHHAHA
AHA HAHHAHAH AHHAHHAH HHAHHAHHAHAHHAHAHAHHAHA
AHA HAHHAHAH AHHAHHAH HHAHHAHHAHAHHAHAHAHHAHA
AHA HAHHAHAH AHHAHHAH HHAHHAHHAHAHHAHAHAHHAHA
16. drewster said...
@doomberger, the original poster: I can't help notice that you posted the same story three times from different sources. Please don't do that in future!
@jack-c: You're right that there is a difference between commercial property, residential property, and property shares (whether builders or other). However to investors they were all seen as part of the same booming property sector, so they all rose at the same time. In the same way, the dot-com boom saw shares like boo.com treated just like Microsoft shares; the difference being that only one of them had a sound business model.
If commercial property is falling first it's only because it has less sentimental value than residential. As Merryn Somerset Webb wrote, people will scrimp and save for the homes their families live in; but they won't fight for an off-plan two-bedroom apartment in Leeds. They certainly won't fight for a share of an office block in Croydon. This makes commercial property more subject to downturns than residential.
17. cyril said...
Drewster' is right I think
Also I would think that the commercial property market behaves slightly differently to residential property because it tends to be on short lease instead of a mortgage but I can't work out what effect that would have.
This is my last day at work so Merry Christmas and a Gloomy New Year everyone! May all your wishes come true.
18. drewster said...
That's right Cyril. Most commercial leases are e.g. "Fixed for ten years with a 6-month break clause after the first year". (How I wish residential tenancies were more like that.) The short lease makes it more vulnerable to shocks. For example if a chain of shops (e.g. Woolworths) falls on hard times and closes some branches, it releases the space with just six months notice. That affects rents and prices very quickly. A home-owner doesn't behave like that - if their kids grow up and move out, they don't usually let out the spare room.
Visually, our neighbourhoods will change. Although premium shopping areas such as Oxford Street will always remain fully occupied (though at lower rents), small parades of shops in local areas will have more vacant units. Eventually these vacant units will be replaced by lower-value shops: if M&S had to close that branch because shoppers couldn't afford to spend there, it might become a Primark or a New Look instead.
19. Island Of Sanity said...
I think the smart money has left while the dumb money remains is absolutely correct. The retail investor is usually the last to get into a book and the last to get out (remeber the dot com bubble ?) . I know a number of people who work in the City who took their funds out of hte commercial property funds in June/July this year, realising the bubble had peaked. Things would get much worse next year and it will be possible to buy into these funds at 20-30% lower than even now. Only an idiot will say "I don't care because I am in it for the long term". Why would you ever want to hold an asset that will be worth one-quarter less in six months time ?