Stress Test

In the aftermath of the subprime meltdown, how are property-sector CFOs coping?

But when the market will settle down is a subject of much debate. At a recent conference in Berlin organised by the Investment Property Databank, there was plenty of disagreement about the current state of play. A crisis? A freeze? A crash? Delegates also argued over how long the turmoil would last. Six months? 12 months? Much longer?

Based on his research, Key of Cass Business School told conference delegates that property CFOs should expect to wait until 2013 before feeling relaxed about credit conditions. “If you look back at the 1970s, and even the early 1990s, in both cases there was a credit contraction of bank lending to real estate of 20-odd %,” he said. In measuring the leverage — the outstanding debt against the total property stock — he found that it fell for about six years following a cycle’s peak. “The credit in absolute terms actually contracts for at least three years, but the leverage continues to contract, because after that you have a period when the value is still recovering, but the debt is not rising as fast,” he explains.

Can Europe’s property companies survive for such a long stretch? Many CFOs believe they can, arguing that the lessons they’ve learned from past downturns have shown them how to weather the crisis. But, as Key cautions, “history is not always as robust a guide as we might hope.”

Janet Kersnar is editor-in-chief at CFO Europe.

Public Property

There was a big development in the UK’s property market last year, but it didn’t involve any bricks or mortar. Around three-quarters of the UK’s major quoted property companies — including Land Securities, British Land and Hammerson — took advantage of new rules allowing them to become real estate investment trusts (REITs), giving them a tax-advantaged status and more flexibility to buy and sell their property that REITs in other countries — including the US, Australia, Germany and France — enjoy.

Of course, the timing could have been better. After a promising start, UK REITs’ share prices ended last year 40% lower. But the switch is more positive when viewed from a longer-term perspective, says Simon Melliss, CFO of Hammerson. “If you owned a property on which there was a large capital gains tax, you probably didn’t sell it,” he notes. “Once that inefficiency was removed and you are on the same footing as a UK pension fund and every other investor, tax doesn’t become a consideration.”

Will the new legislation help newly formed REITs in the UK weather the credit crunch? “It’s too soon to say,” Melliss contends, during an interview at Hammerson’s headquarters off London’s Bond Street. “You need to come back and speak to whoever is sitting in this chair in 2018 and see how it has worked.”

Retail assets in Europe are expected to outperform offices over the next five years.
Debt has been rising faster than assets for UK property firms.
European yields vs. cost of finance

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