Real estate displays survival skills in tough 2012 climate

Investors have largely stuck with property this year, reports Jane Roberts, convinced by its ability to deliver reasonable returns – even against a backdrop of double dip UK recession, eurozone economic turmoil and banks’ struggle to claw their way back from the global financial crisis

It was a far from sparkling year for the UK and European economies, or for many banks, yet property has not been shunned rather the opposite, as its relatively high income return has kept investors onside.

On balance, 2012 probably turned out better than many had feared last January; the eurozone did not split, the US did not enter a double-dip recession and though the UK did slip back into negative growth, it was a much shallower and shorter dip than Q2 2008-Q2 2009.


Hammerson’s David Atkins, British Land’s Chris Grigg, Nick Leslau of Max Property and Delancey’s Jamie Ritblat sat down with Real Estate Capital and Barclays to share views on 2012 – and many of their predic-tions turned out to be correct.

Deal volumes were flat, the market was certainly still polarised between prime and unloved secondary, and alternative sources of finance, especially the use of bonds, grew. Still elusive throughout 2012, though, was the inflexion point when office tenants who need to move will take a decision.

RBS chief executive Stephen Hester turned down a bonus worth almost £1m after intense pressure. A month later he told the BBC he was “not a robot” and there had been some “deeply depressing” moments.


Greece continued to dominate the news through the early part of 2012. With just weeks left before the country faced a €14.5bn bond repayment it couldn’t meet without international aid, Athens and its EU paymasters spent the month arguing over the terms of a proposed €130bn rescue package.

Thorntons announced it would close 160 shops. It was followed by others including Game and Mothercare; in November, Comet went into administration.

Some 800 European banks applied for the ECB’s second, €530bn offer of three-year funding at 1% – Lloyds borrowed €13.6bn.

HSBC’s head of real estate finance, Matt Webster, said the €1tn long-term refinancing operation (LTRO) would give banks a breathing space and remove pressure for fire sales, allowing for a more orderly deleveraging over a longer period.


Stock markets soared as Greece finally had the terms of its second bailout agreed by its European partners. Tesco became the first major employer to raise its pension age from 65 to 67. George Osborne announced a cut in the 50p top rate of income tax to 45p, but garnered plenty of ‘omnishambles’ headlines: remember the pasty tax? It sounded like something out of Little Dorrit or Bleak House.


Confirmation came that the UK was in a double-dip recession, with the Q1 2012 GDP figure at -0.2%, after the economy shrank by 0.3% in Q4 2011.


Crisis engulfed the eurozone once more  in the wake of a Greek election when the electorate rejected austerity measures. Markets fell and Spanish and Italian borrowing costs rose to their highest level of the year, as European policymakers admitted that Greece might quit the single currency. Athens had to try again to produce an administration prepared to deliver economic reforms and budget cuts. After 20 years, France voted for a socialist president with Francois Hollande ousting Nicolas Sarkozy.

JPMorgan’s reputation as one of the better-run banks took a bashing when it revealed a shock $2bn trading loss on investments made by, among others, Bruno Iksill, better known as the London Whale.


Greek election number two gave a narrow win for prime minister and right-of-centre New Democracy leader Antonis Samaras, who said he could form a coalition with two left-wing parties. Wags said they had only one thing in common, but at least it was the key election issue: they are all pro-euro.

Spain became the fourth and largest eurozone economy to seek an international bailout, but Madrid insisted the €100bn loan from EU funds was not in fact a full-scale bailout, but solely to recapitalise its banks.

In the UK, Mervyn King announced a ‘funding for lending’ scheme, whereby banks that used the money to lend to small and medium- sized enterprises will get 1% off their funding costs, but must pass the savings on to borrowers. By the end of  the year it was still hard to tell how much impact the scheme was having, though anecdotally, property loans were being made.

The Libor rigging scandal broke over Barclays, which was fined a record £290m.


A few days later, Barclays’ chairman, the suitably Roman-sounding Marcus Agius, fell on his sword, followed a day later by chief executive Bob Diamond.

There was more stimulus from the Bank of England in the form of another £50bn of quantitative easing.

The Q2 UK GDP preliminary estimate was  a shocking -0.7% – the third consecutive quarter of negative growth. It was put down to a sharp fall in construction, which alone generated 0.4% of the decline, appalling weather and two days’ holiday for the Queen’s Diamond Jubilee. But as with the Q1 figure, it was later revised up, to -0.4%.


Standard & Poor’s cut the US AAA rating (to AA+). In the UK everything stopped – for the London 2012 Olympics.


Barclays’ new boss, Antony Jenkins, said there would be no break up of operations by selling off the bank’s investment arm.

Germany’s highest court ruled in favour of the creation of the European stability mechanism and a €500bn rescue fund to tackle the eurozone’s debt crisis.

The ECB outlined yet another policy with a snappy acronym – OMT (not OMG), or the ‘Outright Monetary Transactions’ policy. Roughly translated, this means the bank will buy lots of sovereign bonds if needed and will not claim seniority on them


New York’s attorney general sued JPMorgan for allegedly defrauding investors who lost billions on mortgage-backed securities written by Bear Stearns.

Vikram Pandit stood down as Citigroup chief executive after a boardroom row and five years at the top of the bank.

Hooray! The UK emerged from recession, but it took an Olympian effort to bounce back; the 1% GDP growth in Q3, well above expectations, was thanks in part to the Olympics and Paralympics.

UBS signalled a dramatic retreat from fixed-income investment banking, announcing 30,000 job cuts.


Paul Tucker, Mervyn King’s deputy, was hot favourite to take over from him as Bank of England governor in an expanded role next year, when the BoE takes back responsibility for regulating banks from the FSA, via the new Prudential Regulation Authority.

But at the end of the month the govern-ment announced that it had secured Mark Carney, after courting him for nine months. Carney has been praised as Governor of the Bank of Canada and head of international banking regulator the Financial Stability Board. He takes over in June 2013.

King’s peculiar brand of doom and gloom, which would put most journalists to shame, probably won’t be missed – Europe was
“tearing itself apart” and our children will be “living in the shadow of economic crisis for a long time to come”, were two of his 2012 pronouncements.

In the US, Barack Obama overcame a sluggish economy and high unemployment to win a second term in the White House.

Eurozone GDP fell 0.1% in Q3, tipping the region into a double-dip recession. The BoE halved its UK growth forecast for 2013 to 1% and there was talk of a triple-dip recession this winter.


The Chancellor left the worst till last, although it wasn’t a surprise. With no growth, he admitted that he is going to miss targets to remove the structural budget deficit and the ‘age of austerity’ will have to be extended until 2018 – three full years after the next election.

For those puzzled about why Osborne didn’t seem worried, the BBC’s political correspondent, Nick Robinson, offered  his theory to a group of property hacks Xmas-lunching at CBRE.

Recent times and elections have not been typical, he said: the long-reign of Thatcher/Major, followed by Blair/Brown, were the exception rather than the rule. Usually each time a general election comes around, the voters throw out the incumbents. If the economy were to be showing marked signs of improvement by 2015, voters would feel safe in voting Labour – but if things were still dire, they might not dare…

Finally, real estate may seem an interna-tional business these days but it has a long way to go. The Gangnam Style dance craze of pulchritudinously-challenged pop star Psy became the ‘most liked’ YouTube clip ever, with almost 1 billion downloads.

Reasons to be cheerful, part 1: quoted property outperforms

The UK quoted real estate sector rose by 25% in 2012 and outperformed the FTSE All Share by 16%. The sector’s discount to NAV closed from 20% to 2%.

Stick or twist in 2013? Espirito Santo thinks the performance will be difficult to repeat in 2013. “Price movements in listed UK real estate typically lead the direct property market by 6-9 months. If the first half of 2014 is the inflexion point for capital values, this implies a reaction in equities in mid to late 2013. This strikes us a somewhat hopeful prognosis.”

Covering the wider European market, Morgan Stanley is more bullish: “We  think the sector will yet again outperform. Property warrants an overweight stance in any generalist or financial portfolio.”

Reasons to be cheerful, part 2: distressed deals pick up

This year was a better one for investors hunting for distressed properties. The flow of deals gradually picked up in both the direct property market and in debt.

PricewaterhouseCoopers estimates that sales of European non-performing property loan portfolios will jump to €22bn this year, led by Lloyds, which has agreed sales of six portfolios in the UK and Ireland in the past six months alone (see p5 and p22).

“Of the economies in turmoil, Ireland has done the best job of restructuring itself,” says Roger Orf, European head of real estate at Apollo Global Management, which is buying Lloyds’ Irish Project Lane NPL portfolio. “We will sell out of Project Lane aggressively over the next three years.”

Apollo is also targeting Germany, the UK and Spain, where it says German investors are trying to sell.

Reasons to be cheerful, part 3: a better year for some banks

The year started badly for traditional property lenders, with Clydesdale and Yorkshire banks, Berlin Hyp and Nationwide joining Eurohypo on the roll of former lenders. De Montfort’s mid-year lending report shows the extent of legacy book problems.

Slotting has not gone away either. An IPD study called the FSA’s envisaged risk-weighting scheme “a potential threat to financial stability”.

Yet there are pluses; one-by-one new lenders have entered the market, the latest being Starwood (p2). Investment banks like Deutsche Bank and Citi have had a better year than they expected; by Q4, competition drove down all-time high margins on large,  asset-management-intensive or loan-on-loan finance deals. Eurohypo UK may even ride again, with Commerzbank appointing Barclays Capital to explore a sale.

Reasons to be cheerful, part 4: foreign capital keeps coming

Despite, or perhaps because of, all the UK and eurozone economic doom and gloom, international investors continued to target European property, mainly high-quality, large assets.

CBRE central London investment director Simon Barrowcliff believes North American, Middle-Eastern, German, Norwegian, Italian, Korean, Malaysian and Chinese investors who bought in 2012 will return for more in 2013. He sees fresh capital coming from China and Hong Kong and new money from Australian superannuation funds.

Although many are investing directly  or through joint ventures, there were encouraging signs that fund managers with good track records, few legacy issues and long-term teams can still raise money.

Patron Capital, Tristan Capital and Rockspring raised €1.85bn of equity capital for both core-plus and opportunistic strategies this year.

One chief executive says he detects a thaw in the US investor community. Speaking after a US fund-raising trip this month, he said: “We’ve had a lot of US enquiries and the tide seems to have begun to turn in the past six months.

“In the first half of the year, Americans thought the European Union would end, led by Greece; now they think it will not, and rather that there may be buying opportunities over here. I wouldn’t say it’s completely gone, but the fear factor has decreased by 50%.”

Reasons to be cheerful, part 5: returns to rise… some time

It’s not just the 31 contributors to the Investment Property Forum’s consensus forecast who think 2012 will turn out to have been the bottom of the market for UK property. They predict 2% total returns this year, rising to 5.1% in 2013 and 7.6% in 2014.

“It now looks as if there are some very good opportunities in the UK,” says Rockspring chief executive Robert Gilchrist. “The opportunities for a rebound need close inspection.”

When the market fell to a low point in 2009 during the summer, “we all thought there were going to be wonderful buying opportunities across many areas including core, then suddenly sentiment changed and though values didn’t recover all they’d lost, 7%-City-offices, for example, moved 100bps in a few months. There will be a point to buy better secondary property.”