Prew on Prozac
Posted by Mark on 7th Jan 2009
If you're feeling down in the dumps, sat at your desk thinking that 2009 looks a bit bleak, Mike Prew, Nomura's real estate analysis has some seasonal cheer for you.
His latest Panglossian missive on the UK REIT sector is entitled "the-end-of-the-big-freeze
"; it does exactly what it says on the tin.
Now Mike probably has a brain the size of a planet, but there are a few points I can't quite agree with:
"Low real estate prices are a symptom of economic conditions, not the cause"; so this world wide recession wasn't kicked off by collapsing housing prices in the US then?
"trading buildings with attached debt to give some valuation visibility"; trading buildings with attached debt only gives valuation visibility for valuations of buildings with attached debt, not the underlying real estate. Without the NU debt, what price would the Dawnay Day portfolio have sold for, if at all?
Well that's the first paragraph of a 23 page paper critiqued. I won't go on, well OK, only a little bit.
On a more general note most of the paper discusses the relative value now provided by the property yield over cost of finance, a well understood argument. However this is somewhat undermined by the observation that "interest rates could go up as quickly as they went down"; this will hardly help sustain yield compression and values over the medium term.
On a more general note I find it odd that a paper who's main, and correct, thesis that the recent driver of real estate pricing has been "the overwhelming effect of capital flows", then makes little or no attempt to address the likely availability of debt finance or lets face it, even equity, to sustain a recovery.
Actually he does suggest that UK commercial lending will "deleaver" from £250bn to "£100-150bn"; this process has hardly even begun and look at the effects.
To put it in analyst speak, I agree that to date we have a felt the "denominator effect" on values, however this year we will have the further negative feedback of the "numerator effect" which will further increase bad debt provision, which in turn will effect the availability of finance and destroy yet more equity (page 17, if you need a translation).
But what do I know, I'm a humble surveyor.
On the other hand Mike's a long established equity analyst, in his last position at Lehman's, he called the bottom of the property market on the 12th September last year, I forget what happened on the 15th......