Credit restrictions weaken global real estate


Property developers from London to Tokyo are suffering from the limitation of bank loans.

First came the housing crisis in the United States. Now comes the backlash overseas. With the global financial system still reeling from the credit crunch, high-rise projects stalled in London, property developers go bankrupt in Tokyo, and Indian office space can be bought for cheap. sales.

What do bad US home loans have to do with office buildings on the other side of the planet? Many things. Global creditors, chastened by the US subprime mortgage debacle, are denying credit to many builders and demanding tougher terms on loans to buy or refinance commercial properties. And as those same creditors lay off thousands of workers, they need less office space – driving down rents and prompting developers to reconsider their plans. “It is impossible today to confine financial crises to a single area”, says Minoru Mori, director of the Mori Building in Japan, which has just inaugurated the 101 floors of the Shanghai World Financial Center, the highest China skyscrapers.

Business has fallen sharply. The trade value of global property deals was just $306 billion in the first six months of this year, about half the level of the same period in 2007, according to estimates from research group Real Capital Analytics. “It’s hard to gloss over what’s going on,” says Dan Fasulo, director of research at Real Capital. “The environment is the toughest we’ve seen in some time.”


It is probably London that is suffering the most. As commercial property financing costs have soared in the UK capital, only 3 of 19 major office building projects announced since 2004 have gone ahead as planned. Developer British Land is delaying construction of a 47-story skyscraper commonly known as the Cheese Grater (due to its triangular profile). “Overall, purchase prices for UK commercial property are down 20% since mid-2007 and could fall another 15% in the coming year,” said Kelvin Davidson, an economist at the firm. London consultancy Capital Economics. “The market recovery will not happen before 2011.”

It may be too late to help Metrovacesa. The Spanish real estate group spent 3.7 billion dollars in 2007 for the London headquarters of HSBC bank, the biggest real estate contract ever handled in Europe. HSBC agreed to stay in the building and offered Metrovacesa a short-term loan of 1.5 billion dollars, repayable this fall, while the Spanish group sets up a long-term financing plan. But analysts estimate that the building has since lost at least 25% of its value, and Metrovacesa has yet to secure new financing. The company says it is confident in its ability to close a deal.

The Subprime crisis is not the only source of problems. In Japan, banks are doing relatively well in the wake of the US chaos. But a declining economy and lack of consumer confidence have hurt small developers. Nine listed groups in the real estate and construction sector went bankrupt this year, including Sohken Homes on August 26, which filed for legal protection against creditors. This, in turn, caused profit warnings (anticipated losses) for banks that lend to companies.

Unlike previous recessions, too much construction is not a big problem. Vacancy rates remain low for many markets, so rents are stable. “People have learned the lessons of the 1980s, when easy loans led to massive investments,” said David J. Siopack, co-director of the Schwab Global Real Estate Fund with $190 million in assets. This time, he says, “there was a little more discipline.”

Over-exuberant development has largely been confined to fast-growing markets, especially China and India. In the Chinese cities of Zhengzhou and Chongqing, more than 30% of the space is vacant following an excess of new constructions built two years ago. In addition, this year, construction in the two cities of an additional 1.5 million square meters is due to be completed, according to Jones Lang LaSalle. In India, inflation, high interest rates and stock market turmoil have had a negative impact, with rents reduced by almost 40%, according to Pranay Vakil, president of Knight Frank India, a consultancy firm in real estate. The US slowdown, meanwhile, has dampened demand for “office space complexes” used for outsourcing by Western companies.

So far, damage to backers has been limited. But banks in Ireland and the Netherlands could be forced to register an unrealized capital loss, and property-focused investment funds in Western Europe could find themselves in trouble. The outlook is still bleak in Spain, where property prices have suffered a freefall. Martinsa-Fadesa, a major real estate company, filed for bankruptcy in July, and another major developer, Colonial, is struggling with financial difficulties related to its $14 billion in debt.

With all this bad news, the situation creates opportunities for those who already have funds. Pension funds and sovereign wealth funds “still have money to invest,” says Tim Jowett, analyst at Swiss bank UBS. But developers will likely wait a while. Conservative investors certainly won’t put money into the market today, Jowett continues, if they believe that “in 6 or 12 months, prices could fall even further.”

Carol Matlack With Peter Coy in New York, Mark Scott in London, Chi-Chu Tschang in Beijing, Ian Rowley in Tokyo, and Nandini Lakshman in Mumbai translation L. Traoré

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