09.10.09

By Mike Slade

Could now be the time to hug a banker?

Like many of you who are enjoying the excellent autobiography, Leading From the Front, I spend most of my nights in bed with Gerald Ronson. He makes it all sound so straightforward and I envy his energy and drive. Gerald is careful not to give too much away, leaving us poor mortals to try to make sense of this helter-skelter world.

What I do know is that his Heron Tower is looking well timed and his courage will be handsomely rewarded — a reminder that property companies need strong and courageous leadership. This is best found in situations where management invests its own money alongside shareholders’.

Against this confusing background, and with not a little pain at all levels, some interesting questions arise. For example, what’s wrong with a “bonus culture”? Savills and many others have successfully run their business on this basis, as indeed have we at Helical Bar. You pay a basic wage, nothing flash, but those that bring in the gains receive the rewards. Yes, both Savills and Helical Bar play with shareholders’ money but therein lies the difference between us and the banks. The investment bankers are playing with depositors’ money and there may well be a case for introducing the Glass-Steagall regulations on a global basis, to separate lending bank operations from the investment bank casino.

Crash comparisons

I recommend another book, Lords of Finance by Liaquat Ahamed, to compare the 1929-31 crashes with today’s. The choices for the world’s leaders are remarkably similar.

Quantative easing must continue as advocated by Bank of England governor Mervyn King and interest rates need to be kept historically low for much longer than the derivative markets suggest, but who knows?

What value do you put on a seven-year lease? Clearly valuation rules apply but, given that lease lengths in all sectors have reduced and global funds are buying up any remaining long leases, this question regularly comes up. Empty rates crucify voids and a single tenancy becomes a disadvantage. Short leases remain “the danger zone”.

This leads me to suggest that development and thereby — hopefully — the creation of new investment stock with long leases to top covenants is where the “big” money is to be made as we emerge from recession.

How to deal with the lack of available credit? The property market needs occupiers and a ready supply of debt. After the Lehman collapse, I said I’d like to punch a few bankers on the nose. Now that those responsible have in the main moved on, we should no longer denigrate our bankers — rather, we should be supportive. The UK majors have competent recovery teams who have their work cut out and deserve any bonus they get.

Recent figures suggest economy-wide losses in the billions, of which only £240bn have so far surfaced. We can only guess at how much relates to property. Here and in the US, we have a historically large credit contraction. The argument rages on whether the banks should be allowed to simply plaster over the cracks and, as a result, remain unable to feed the demand for debt.

I foresee a steady supply of distressed real estate over the next three years, which explains why the derivative markets anticipate very limited capital value gains — total returns of 9%-10% — over the next five years. Whether slow degearing and the still-awaited government asset protection scheme will prove sufficient to enable the banks to resume normal lending activity is a determining factor in the UK’s future performance.

The economy needs to be strong and the property industry needs credit, otherwise none of this huge amount of property on the sick list will ever find a healthy home — a proper catch 22.

You may remember the first crisis of October 1987. The market recovered until October 1988, when we had a second crisis, followed by a third in 1991, lasting until 1995. I have been quoted as depicting a “www.future”. I hope I am wrong but I will certainly be running my “book” on this basis. If things get better quicker, then all to the good.

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Source: Property Week (www.propertyweek.co.uk)