With the global economy in a pronounced downswing, the seemingly never-ending rise in real estate values across the world has, in many economies, come to a juddering halt and gone into reverse writes James Moore.
The story is now well-known – falling house prices and rising interest rates in the US prevented borrowers from re-financing their loans forcing thousands of people to default. Those defaults have shaken some of the world's most august financial institutions and the economic contagion caused by the sub prime crisis has spread around the world like wildfire. The consequences of the credit squeeze that resulted are being felt across all sectors of the real estate market today.
For many property investors, who have reaped the rewards after a decade of stellar returns and unprecedented cross border investment, the key issue is how low can property values can now fall. Yes, the climate is about as gloomy as it can get. So how should property-laden families react to the current downturn?
The situation is complicated for family offices by that emotional pull. Family members often form deep attachments to properties they have held for generations and are reluctant to consider selling. It is, in many cases, debatable whether theses properties should even be considered as investments at all.
However, many experts argue that now is precisely the worst time to sell anyway. Richard Weber, who is the managing director of Weber Grundstucksverwaltung, which specialises in combined asset and property management services, is one of them. When asked whether families should consider disposing of their real estate holdings, given the current state of the market, his answer is simple. "No," he says firmly.
"If you dismantle or sell real estate now you might have to realise a loss (assuming you acquired it within the last one or two years when purchase prices were increasing). Assuming you have long-term cash flow producing leases on your property, let your property work in your portfolio and wait until the market has recovered! You then can decide whether or not to exit the investment."
But is this, perhaps, at least a time when family offices should be thinking of scaling back one's exposure to the asset class where possible, at least until the current turbulence has calmed and those fabled green shots of recovery can be seen struggling up through the hard earth? Again, Weber argues that for many family offices the answer will continue to be in the negative.
In fact, he argues, now is a time when they should be looking for opportunities to increase their exposure by acquiring assets cheaply as financial investors and institutions, which are often struggling to deal with a heavy burden of leverage, are forced to sell for whatever price they can get.
"Today there is a good chance to acquire bargain property because, in particular, finance investors are under pressure," explains Weber. "The real estate investor needs to put quite a high stake of equity into the property investment (between 30–50 per cent) in order to get a co-financing through a bank loan. This can be quite a challenge for some real estate investors."
Challenging, yes, not least because cheap debt financing is no longer available. What is more, family members may be nervous of taking risks until real estate markets have at least found a floor. However, many experts argue that this is the wrong attitude to take at the current time. The opportunities to pick up distressed assets at very reasonable sums are just too good to miss.
Toby Osborne, director of GSL Private Investors and scion of Melbourne's entrepreneurial Osborne family, is another who is positive about real estate potential. "My family's view has always been very bullish on real estate," he explains. "We're seeing terrific opportunities to acquire distressed assets through the opportunities brought on by the lending squeeze. "
"Real estate has proved from generation to generation to be the friendliest, low risk flexible option,"he continues. "As Marco Spinner from Germany said at the Real Estate conference in London: 'It's the pension fund for family offices.' This will continue to be the way."
In some parts of the world, real estate markets remain buoyant, with signs that growth could continue for a good few years yet. "Currently we're seeing some tremendous opportunities in Australia," he says. "The economy is very well positioned and through the geographic location, further growth is inevitable."
What he is referring to, of course, is the proximity to the tiger economies of South East Asia, and especially China.
Martin Allen, a property analyst at Morgan Stanley, says in a recent report that the Middle East is another area where investors feel there are attractive gains to be made. In the report, which provides feedback from the investment bank's recent property conference, he says that most investors have begun to take a much more cautious view of prospects for the real estate sector. However that is not to say there are not opportunities out there for those willing to look for them.
Morgan Stanley's team says that there do remain chinks of light, as far as property shares, and therefore the wider property market, are concerned: "The biggest upside risks to property shares in Europe over the next 12 months are judged to be bids and a possible buying spree by sovereign wealth funds."
The last point should not be overlooked. Activity from these funds is something family offices should pay attention to given the characteristics they have displayed and the way they make their investment decisions and treat their assets thereafter.
Weber councils that those working within family office should speak to those for whom they act to explain the current situation carefully. He admits that he is unable to offer a profound answer on whether some properties should even be considered as investments. But the clear view of experts such as himself and Osborne is that family offices should not panic.
Instead they should carefully explain the situation to family members and then hunt for opportunities. There are plenty out there. But they might not be there for long.