The booms and busts of real estate cycles

March 10, 2014 admin

A speaker at our recent VIP – Europe conference in Copenhagen pointed out that the last three real estate downturns were all spaced 17 years apart. That’s useful to know, especially if you’re concerned about when (not if) the next real estate downturn might come. 2007 + 17 = 2024. Can you wait that long?

You might not need to. Another speaker at the same conference suggested that alarm bells were ringing already in some European real estate markets. Apparently all will be revealed at MIPIM later this week.

People are at least alive this time to the possibility of a crash. One of the peculiarities of the 2007 downturn, which turned into the 2008 global financial crisis and the 2008–2009 general recession, is that plenty of people saw it coming but only a prescient few did anything about it or, even better, sat on their hands and did nothing at all.

Another is the number of people who hadn’t seen anything like it before and didn’t know what to do. That’s what happens when events are spaced 17 years apart; the people who were around last time and learned from the experience aren’t around next time to pass on the benefit of their experience. Could that happen again?

We now know that the best thing people can do in a downturn is keep the information flow going. Investors don’t like not being told the bad news, if bad news there is. The winners from 2007 are those who weren’t invested, and those who were invested and made sure that their investors were kept fully informed.

We also know that people are alive to the possibility of a crash because we carried out a press-your-button-now zapper poll in the room at VIP – Europe. 70 percent of delegates “agreed” (51 percent) or “strongly agreed” (19 percent) that real estate markets “would burn again” in five to 10 years’ time. That’s a pretty high number and, even if we say it ourselves, that was from the kind of senior, well-informed audience that you usually get at a VIP conference.

Europe is awash with global capital as investors seek out real estate opportunities in the various countries, regions and sectors that give them the prospect of better returns than they can find in other asset classes and markets. The final quarter of 2013 saw a strong end to a burgeoning year for transaction activity and from what we hear that strength of activity, frenetic almost, has continued into the first months of 2014.

The streets of Cannes will be heaving this week as the visitors to MIPIM make and renew contact and do deals. But as Russia’s interventions in Ukraine have shown, it doesn’t take much in Europe to upset investor sentiment and confidence, especially when the source of the upset is geographically not that far away — and potentially even closer geographically if things go out of control. When you hear that the United States has sent fighters — the flying kind — to Poland and Lithuania and destroyers — the floating kind — into the Black Sea (OK, just one, so far), you realize there is scope for catastrophic error. Long memories, uncompromising and intractable attitudes, and obstinate, stage-managed Cold War behavior and rhetoric — 25 years after the Fall of the Berlin Wall — do not augur well.

“I love surprises; it’s the suspense I can’t stand,” goes the saying. The next real estate “bust” will come. We just don’t know when. Whether due to geopolitics or real estate fundamentals, the best thing we can do is be ready for it. Are you ready? Can you stand the suspense?

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RichardFlemingRichard Fleming is editor of The Institutional Real Estate Letter – Europe.

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