How many times have you heard that before? It’s one of the most often used and abused phrases in real estate, a few simple words that can be used to justify just about any decision, particularly when markets begin to look somewhat frothy.
This time will be different so, of course, it makes complete sense to acquire prime assets in Europe at what can only be described as eye-watering levels. The maths tells us that it makes sense, and the argument verges on the compelling. It begins with a recognition that the prime end of the market is highly liquid, with no shortage of capital in a way that — at any other time — would look remarkably like the peak of the cycle, particularly as we move into a phase of monetary tightening in the United States and the United Kingdom, followed sometime later in the euro zone. But this time will be different because we’re only at the beginning of the economic cycle and rents will surely take over as yield compression runs out of steam.
It is intuitively attractive. The only problem is that, while yields are global, rent is local — the function of a local balance between supply and demand — and that means that comparatively few markets will record the sort of growth, employment gains and net absorption required to fuel real rental growth.
This time will be different because clearly we don’t have the same sort of debt levels in the market as we did back in 2006–2007. It is true that the market is not being driven by debt buyers to the same extent as previously, but that does not mean that it couldn’t change pretty damn quickly. As competition between lenders increases, margins will fall, and some debt providers will exit the market (GE, for example) or they will be tempted, or forced, to take on higher risk.
Speculative development finance is no longer rare; the most conservative of insurance groups are now willing to lend in southern Europe; lenders have moved to specialist sectors in second- and third-tier markets, and have moved to non-core and structured debt products; CMBS will return; and all we now need is for a bunch of new acronyms purporting to reduce risk to enter the language, and here we go again.
It is against this background that the recent broadside from the Bank of England should be heeded. It warned commercial real estate lenders of falling underwriting standards in the commercial real estate market — a red flag, if ever there was one. Previous warnings from the BoE came too late and were widely ineffectual, but this time will be different.
This time will be different because there is no risk of contagion in the aftermath of the Greek crisis. It’s not like 2012, when there was plenty of macro risk around and the very real possibility that the entire European house of cards would come tumbling down. After all, the ECB is now endowed with infinite power and backbone to counteract whatever capital markets choose to throw in its direction; the European Stability Mechanism can lend up to €500 billion to countries so long as they are able to show a “pro-reform” stance; foreign bank and bondholder exposure to Greece has fallen by 80 percent since 2012; and finally, when all is said and done, there is not that much more money to be lost in any case. So this time will be different.
The danger of contagion is alive and well, it just takes a different form. The seeds of contagion have been sown and will quickly flower if Greece’s misery doesn’t discourage anti-austerity movements elsewhere and, in particular, if it fails to keep Italy, Spain and France on the path of reform. It will undoubtedly raise its head, once again, in the backlash that will follow as the credibility of the EU project comes centre stage, quite possibly during the UK referendum.
What are the lessons for real estate investors? Firstly, this time won’t be any different and, secondly, no-one will be rewarded for taking macro risk.