Coming full circle: a 30-year perspective

After 30 years writing about real estate finance, I’ve been doing a rather indulgent thing: looking back over that period of real estate history.

“Inflation is low, money is cheap and banks are lending freely on commercial property. Lenders and borrowers are on a roll,” I wrote– spookily, exactly 16 years ago, at the end of June, 1999.

I was reporting on the UK property market at the time; real estate, and its financing, was still  predominantly a local affair.

UK property yields, which had been relatively high, were dropping, and the cost of longer term finance was moving up (though then it was 6.15% for five-year fixed!). Margins were under pressure and LTVs up.

“Fierce fighting for safe investment loans has been shaving margins down. They are now well under 100bps – how much under depends on the deal, but 70-75bps is cited as the normal level,” I reported.

The thin spreads were pushing lenders to different, more rewarding areas: development finance, secondary properties, mezzanine debt. Some, like Bank of Scotland, had even started putting equity into joint ventures.

The lending field was getting crowded. William Newsom’s annual reckoning for Savills counted some 55 active ones in the UK. German banks were strong; at 16, they were the largest group.

“There are banks which are buying their stake in the market. It has to be proved that they will stay through the next recession,” said Georg Funke, ceo of HVB. Ironically, HVB’s property loans would be spun out into Hypo Real Estate, which in 2009 almost went to the wall, receiving a €52bn bailout/nationalisation.

UK clearers were also back in the game – with the Scottish banks RBS and Bank of Scotland leading while Irish banks were ramping up their lending and building societies were moving in. At another newcomer, Morgan Stanley, its head of real estate John Carrafiell was complaining that German Pfandbriefe banks’ lower cost of capital gave them the edge: “If we go head to head on prime central London properties, we can’t compete.”

So, as my fellow countryman, baseball player Yogi Berra said, is it déjà vu all over again? I’m definitely getting that feeling. At Savills, William is still tracking the UK lenders, and a couple of weeks ago, reported there are now 225.

The Germans are still here, though fewer in number, and their rivals are still complaining about their lower cost of capital. The UK banks are back in the game – though without the Bank of Scotland. And as we’ve been reporting in Real Estate Capital, there’s been a rash of new entrants, Not just foreign banks, but hedge funds, sovereign wealth funds, debt funds and private equity money managers such as Blackstone and Starwood.

The cost of borrowing and investment yields are historically low: below 3.5% and prime City of London yields, 4%, respectively. LTVs are said to be holding for senior debt, but margins have dropped. Competition and thin spreads are driving lenders into development funding, value-add (aka secondary), regional property and alternative sectors such as hotels and student accommodation.

So there are lots of parallels with 1999. But there are also major differences: financial regulation, the globalisation of real estate capital and the speed at which it travels.

However, there seems to be one constant: real estate does go in cycles. There’s a view that these peak roughly every 18 years. On this reckoning, we’re about halfway through the process.

I’ve now seen three of these boom-and-busts  the first as a researcher, the last two as a journalist.  They’ve been exhilarating, painful  and fascinating to witness, and write about.

However, I’ve decided that three’s enough, and I will watch this current one unfold from the sidelines;  this is my last piece as consultant editor for Real Estate Capital.

I’ll sign off with a quote from investor John Templeton, “’This time is different’ are among the most costly four words in market history”.