EDITOR'S LETTER: Dark side of the cycle

PERE magazine, February 2010 issue

On 13 January, millions of Punjabi in Northern India gathered to celebrate the Lohri festival, or the beginning of the harvest festival. The ceremony is an especially significant one in the Punjab calendar as it marks the end of the dreary, dark days of Pos (mid-December to mid-January) and ushers in the bright and sunny month of Magh.

Real estate investors are hoping the start of 2010 marks their own Lohri, as the industry attempts to say goodbye to the bitter days of 2009, and welcomes in brighter days ahead. Winter, though, apparently wants to hang around.

Real estate investors are hoping the start of 2010 marks their own Lohri, as the industry attempts to say goodbye to the bitter days of 2009, and welcomes in brighter days ahead. Winter, though, apparently wants to hang around.

Despite one of the severest recessions in history, the subsequent opportunities in commercial real estate have, to date, been disappointing.

Banks are unwilling to unload underwater assets, or even mark their assets to market, in the full knowledge that doing so could result in many of them being declared insolvent. As a consequence, borrowers are living off the hope certificates of debt extensions and clinging to the (perhaps false) belief that valuations will raise soon, thereby salvaging at least some equity.

The realities of the market are dashing many hopes and expectations, including for the US government. As I report in this issue, when the Public-Private Investment Programme was introduced last July there were high hopes it would significantly ease market illiquidity, particularly for residential and commercial real estate. Just over six months later, questions are being asked over the usefulness of PPIP.

There are, however, glimmers of light shining through the dark. Real estate markets are creaking back into life, with some executives even warning of the possibility of mini bubbles.

What is required is patience and discipline. The crisis that started in 2008 is still running its course for commercial real estate investors, with some ways to go if economists are to be believed. It’s exactly why Merrill Lynch has opted to shelve plans to sell the lion’s share of its real estate principal investments division. Jonathan Brasse explains with sales and values beginning to improve, why force a sale before a possible market return? For those seeking a refresher in discipline, turn to Robin Marriott’s Blueprint interview with Harbert Management Corporation European head Scott O’Donnell.

The industry may still be experiencing the dark days of a real estate recession, but investors can take comfort in the fact the sun always rises.

Enjoy the issue

Zoe Hughes
Senior Editor, Real Estate
Zoe.h@peimedia.com