Chairman's corner
Chairman's Corner January 2010
The world is changing
In 2009 the effects of the global credit crisis became clear(er). As fears of an immediate collapse of our entire financial system subsided, financial markets have started to recover although the recovery seems fragile. This is because measures taken by Central Banks to calm the market might lead to economic risks on the longer term. Real estate markets in most countries are under severe pressure, whereby the United States have been hit harder than most European markets. The British real estate market has shown a revival since the second half of 2009, with prices increasing strongly (too strong to our opinion) because of opportunistic capital chasing few investment alternatives. Whether this optimism is justified, or early, is something that 2010 will tell us. At this moment the French and German real estate markets seem to offer better opportunities because of declined real estate prices, relatively healthy rental markets and limited overhang of existing rental space. Moreover, without exception all parameters like employment, vacancy rates and rental prices are expected to decline in 2010 before improving in the years to come.
Inevitably, market conditions have had an effect on both IBUS and its real estate portfolio as well. Apart from launching a German residential fund and a UK high street retail fund, IBUS has refrained from launching new funds in 2008 and 2009. In our view, real estate prices in those years simply did not reflect the new reality. We benefitted from the strategic decision taken some five years ago to diversify out of the risky office sector into rental apartments. All in all IBUS’ investment portfolio has performed relatively well during the crisis, with the challenges in the portfolio being primarily concentrated in our US holdings. Market conditions have also had their effect on other real estate investment firms. We have seen a number of real estate fund management firms disappear during the course of 2009. We expect this trend to continue in 2010. We consider ourselves fortunate with our solid financial base and sound operations.
We expect to be able to offer new investments again from 2010 onwards as continuing market turmoil will lead to opportunities as well. In this context, we are happy with the access that we have to financially strong investors. ‘High net worth’ investors seem to be looking more actively at market opportunities than institutional investors for now. Investors prefer investments that are simple in structure with a clear risk profile, contain high quality real estate and strong tenants with long lease contracts and a healthy cash yield. Besides that there is a group of investors looking at the market for opportunities coming from distressed real estate sales. These forced sales were not yet visible in 2009 but this seems to be changing. Both in the US, parts of the eurozone, like in The Netherlands, the number of bank forced real estate sales is on the rise as banks are being forced to do so by regulators.
Many banks need to strengthen their balance sheets and are pulling back towards their core or home markets. This leads to a possible future decrease of banks to choose from for financing of real estate. Conservative underwriting assumptions will be a must in the coming years in order to obtain financing. The advantage of these trends is that the focus will come back to fundamental knowledge of the local real estate market again which will benefit real estate specialists. As a result, financially oriented market players that have dominated the market over the past few years are expected to become less active. Fundamental knowledge of the local real estate market and alignment of interest between the real estate management company on the one hand and the investors on the other hand, will become leading again. This is a positive as it benefits all stakeholders.
In 2009 the effects of the global credit crisis became clear(er). As fears of an immediate collapse of our entire financial system subsided, financial markets have started to recover although the recovery seems fragile. This is because measures taken by Central Banks to calm the market might lead to economic risks on the longer term. Real estate markets in most countries are under severe pressure, whereby the United States have been hit harder than most European markets. The British real estate market has shown a revival since the second half of 2009, with prices increasing strongly (too strong to our opinion) because of opportunistic capital chasing few investment alternatives. Whether this optimism is justified, or early, is something that 2010 will tell us. At this moment the French and German real estate markets seem to offer better opportunities because of declined real estate prices, relatively healthy rental markets and limited overhang of existing rental space. Moreover, without exception all parameters like employment, vacancy rates and rental prices are expected to decline in 2010 before improving in the years to come.
Inevitably, market conditions have had an effect on both IBUS and its real estate portfolio as well. Apart from launching a German residential fund and a UK high street retail fund, IBUS has refrained from launching new funds in 2008 and 2009. In our view, real estate prices in those years simply did not reflect the new reality. We benefitted from the strategic decision taken some five years ago to diversify out of the risky office sector into rental apartments. All in all IBUS’ investment portfolio has performed relatively well during the crisis, with the challenges in the portfolio being primarily concentrated in our US holdings. Market conditions have also had their effect on other real estate investment firms. We have seen a number of real estate fund management firms disappear during the course of 2009. We expect this trend to continue in 2010. We consider ourselves fortunate with our solid financial base and sound operations.
We expect to be able to offer new investments again from 2010 onwards as continuing market turmoil will lead to opportunities as well. In this context, we are happy with the access that we have to financially strong investors. ‘High net worth’ investors seem to be looking more actively at market opportunities than institutional investors for now. Investors prefer investments that are simple in structure with a clear risk profile, contain high quality real estate and strong tenants with long lease contracts and a healthy cash yield. Besides that there is a group of investors looking at the market for opportunities coming from distressed real estate sales. These forced sales were not yet visible in 2009 but this seems to be changing. Both in the US, parts of the eurozone, like in The Netherlands, the number of bank forced real estate sales is on the rise as banks are being forced to do so by regulators.
Many banks need to strengthen their balance sheets and are pulling back towards their core or home markets. This leads to a possible future decrease of banks to choose from for financing of real estate. Conservative underwriting assumptions will be a must in the coming years in order to obtain financing. The advantage of these trends is that the focus will come back to fundamental knowledge of the local real estate market again which will benefit real estate specialists. As a result, financially oriented market players that have dominated the market over the past few years are expected to become less active. Fundamental knowledge of the local real estate market and alignment of interest between the real estate management company on the one hand and the investors on the other hand, will become leading again. This is a positive as it benefits all stakeholders.
We wish you and your beloved ones a healthy and prosperous 2010.
On behalf of everyone at IBUS,
Pepijn Morshuis