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Golden Era Vanishes

My reading on the plane trip to Cannes was “The Exchange Artist: America's First Banking Collapse,” a book by Jane Kamensky. “A web of increasingly remote, sophisticated and abstract market connections made all Americans gamblers,” she writes, “as it blurred the line between daring and fraud.” The description of America's first banking collapse in 1809 still rings true.

Indeed, there was an undercurrent of uncertainty in the air as some 28,000 investors from Helsinki to Boston gathered for the 19th annual international property market MIPIM conference in early March. A pressing theme emerged: How much is the U.S. subprime mortgage mess dragging down global real estate? What will the global economy look like when it emerges from this downturn?

Dr. Holger Schmieding, Bank of America's chief economist for Europe, tackled the later question first. After all the bad debt has been scrubbed clean off the balance sheets, say in five years, China will no longer have such a big export quota — they'll be importing instead. In the interim, globalization will continue to bring opportunity in the form of ongoing structural reforms in Asia and Eastern Europe.

The current distress in the U.S. has not spread wholesale, but weakness in the world's economic engine is certainly being felt. On the one hand Germany, now the No. 1 exporter in the world, will keep selling its goods to emerging markets as incomes rise. On the other hand, because the U.S. economy represents 25% of global GDP, when U.S. consumers curtail their spending habits, India and China's exports suffer.

At present, financial institutions around the world are demanding and getting higher margins, said Schmieding. “We are likely to see over the course of this year our losses up [due to subprime exposure], but also some improvement in the financial situation of many banks because there will be better margins,” he said. “As a result, we will probably not have all that much of the oft-quoted ‘global credit crunch’ that could turn half the world into a depression.”

Poor ole greenback

To date, the weak dollar has not been an enticement for the vast majority of European investors. Although the euro is trading upwards of $1.56, many Europeans say they want to see a bottom in the American economy — and even some upside — before they are willing to snap up U.S. commercial real estate.

“See me in six months” many investors at MIPIM told Ray Torto, global chief economist for CBRE Research. “My counterpoint to them was that I think it's appropriate to wait some period of time, but I think things will change a lot quicker than you think. Don't go on vacation.”

As for U.S. investors with European portfolios, those numbers are more likely to grow. American investors made up 14% of all commercial property acquisitions in Europe last year. Germany enjoys the largest amount of U.S. investment at 30%, or more than €17 billion. It is followed by France with 19% of all acquisitions, then Poland at 18%.

In today's turbulent capital markets climate, cash is king. While U.S. opportunistic investment — like leveraged investment by Europeans — is expected to decline, U.S. institutional money is likely to keep flowing into Europe. Already heavily exposed at home, these funds are eager to diversify, says Michael Haddock, regional research director for CBRE based in London. Even so, the unbalanced exchange rate could present a roadblock. “It is possible that this will impact institutions' desire to invest in the Eurozone,” Haddock notes, “although it may just cause them to make greater use of exchange rate hedges.”

Cool heads, hot heads

Anecdotally, it's hard to deny that the global credit crunch is on. One U.S. investor lamented during a Q&A session that his company had approached 30 to 50 lenders to refinance a Class-A office building in Tokyo. At the end of the session, this investor had as many people lined up to trade business cards as any of the formal speakers.

However, one of the panelists, Peter Hobbs, managing director and head of global research for RREEF in the U.K., noted that more investors will want to grow their exposure to Japan, which, like Germany, has finally emerged from dark despair. For one, 45% of Asia's GDP emanates from Japan, which also represents 65% of Asia's commercial real estate market. And development opportunity abounds there. For instance, Class-B and C office makes up 83% of the market.

Sibley Fleming is managing editor and green building editor of National Real Estate Investor. She is also the author of seven books. She can be reached at [email protected].

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