What the credit crunch means for investment

September 18, 2008 by gbrown

Tin hat time again.

Don your tin hat, difficult times ahead but take comfort in a 2009 where every property will be 30% BMV and a market with little competition.

If you can make it through 6 months of this, 2009 is going to be full of bargains.

In this outlook I look at the impact of recent developments on property prices. I look at why hotspots such as Dubai, Cyprus and Cape Verde are in for big falls and why you should hold off buying any property for the next 6 months.

The reality
Witness the unravelling of one financial institution after the next as exposure to toxic debts spreads.

With the world’s property markets dependant on the liquidity of the wholesale market and its pariah - the credit default swaps - we’re about to witness over the next 6 months the greatest wealth transfer in history about to unfold. Here are some of the highlights.

Highlights
* The crash hits the hotspots. Property hotspots such as dubai and cyprus witness asset value deflation on an accelerating basis in q4 08 as 3 factors come into play
- 1) local lender financing dries up as the wholesale tap is switched off
- 2) fewer petrodollars in the tank, the imminent crash of the russian financial system and expat us/eu investors with ready cash to pump into the system
- 3) the collapse of developers due to factors 1+2 sends shockwaves through the market Expect topend prices to fall 40-50pct in 18 months.

I had 2 calls from brokers about Dubai Sports City this week because I had expressed an interest about a year ago. They must be trawling their lists. With Americans, Brits crunched out, Indians seeing their real estate take a dive, Russians about to see their whole system unravel and Arab petrodollars drying up Dubai is going to resemble Kuala Lumpur back in the 90s when I visited post the bubble bursting - one great big building site with no action and a half built monorail.

This is all good news, bargains galore. Pick up a villa in Spain for 60% of what you paid for it in 2007. We’re already starting to see these bargains on the market.

* Rental levels begin to calm down. Don’t rely on appreciating rent in your business model as inflation, winter fuel bills and rising unemployment bite.

* Lending becomes more expensive. With libor pushing upwards and the easing off witnessed in the last few weeks reversed in a few crazy hours over the weekend expect BTL lending to get significantly more expensive in next 3 months.

* Investors go home. They say “a rising tide raises all boats”. Many investor boats were floated by the upmarket. Now how do they deal with a market where they’re stuck in the creek without a paddle? I suspect this time next year a large majority of BMVers will be out of the market (maybe 2/3rds or more). That’s the best news yet… more spoils for those who stick the course.

What does this mean to me?

* if you have the choice, don’t buy. Wait until the market calms down, at least until Q1 08. There are plenty of investors rushing into the market expecting bargains galore. Typical of the narrow perspective we have as an industry is an investor believing 30pct bmv today is a real bargain. Well here’s the reality 30pct bmv today is about market value in 12 months so you’ve effectively bought into a lemon.

* Furthermore I would warn against overheating any portfolio by taking on new tenants in new properties. Not only are those tenants extra risk in that you have the possibility of them defaulting/losing their jobs but you could also lose your estate agent in the process.

* Property investment is not just about making hay when the sunshines its also about shoring up your assets when winter approaches. Right now the nights are starting to get longer and investors, like the banks, would be foolish to overexpose themselves at a time when the market has still a long way to unravel. Streamline the business, sweat the assets and look at reducing voids by working those client relationships.

Necessity is the mother of invention. Think of the credit crunch as a sauna for your business, sweating out the unnecessary impurities. Those that make it through to the next round are in a much better shape moving forward.

When should I get back into the market?

* Not Today. We haven’t yet felt the impact of Christmas credit cards, winter fuel bills or the knockon from the city layoffs. When a bank dumps 40000 staff it’s not just 40000 people affected. It’s their partners, cleaners, landlords and all those service companies that once had the bank as a client. Also, the mortgage market will remain relatively illiquid for the next 6 months.

* There’ll be plenty of dead cat bounces and short stab rallies before we reach the bottom. Eternal optimists will see every bounce as a sign we are out of the woods. True, more millionaires were made in the Great Depression than the decade that preceded it but these entrepreneurs bought when the market had fallen, not when it was in freefall. Exuberance has killed many an investor. Good news…less competition.

* I’m looking at a scenario where property prices in 2009 are at least 20-30 pct off what they are right now - so you decide when you want to get back in to the market. The foolish will always talk of “markets within markets” and that “this area” won’t see any drop. True, if “this area” is populated by tenants who aren’t employed or shop in the UK and an area serviced by a unique financial market with banks we have yet to hear about. As such, those areas don’t exist. The crunch is all seeing. Furthermore you can’t decouple the housing market. When you sell a property in Kensington, the buyers can sell theirs in Clapham and the vendor can move to Dorset. All markets feed off each other.

* (high risk investments) areas with largest falls:
N Ireland, North England, wales
Holiday areas
Areas with high “new immigrant” (eg Polish) population
Docklands

* (low risk investments) areas with smallest falls:
London
Student towns