Rebound seen for domestic markets by mid-'92.
Citing fiscal shifts in the international investment marketplace, Jackson Tai, managing director-Real Estate, J.P. Morgan predicted that 1992 will mark the beginning of an upward trend in the land and building industry.
Speaking before the Certified Property Managers and guests of the Greater New York Chapter No. 26 of the Institute of Real Estate Management's (IREM) monthly luncheon, Tai commented that a confluence of investment activity, coming mainly from international sources, will be the catalyst for a domestic real estate comeback.
The capital to reconstitute the dried up domestic real estate industry will come in small streams from several sources. "As an optimist, I believe that the high interest rates for the other foreign currencies such as the deutschmark or yen are not sustainable at their current high level. They have been artificially cranked up to control credit and domestic inflation, but these high rate initiatives won't be politically popular much longer. I think that the high rates and the related gold value of the dollar in the past have discouraged the flow of funds into this country," explained Tai.
Several issues contributed to a retrenchment among Japanese investors in the recent past. Slow returns on existing U.S. real estate investments have exacerbated an already strained relationship between Japanese real estate investors and the U.S. market is not the least of these issues. However, Tai feels strongly that the Japanese have not left the United States real estate arena for good. "Many have written off the Japanese because of their overnight disappearance from our domestic market, but I believe they will indeed solve their capital adequacy problems in the coming months and will return very selectively and very quietly by the spring of 1992," proclaimed Tai.
Another reason the Japanese seemed to fade from the U.S. market was their high priority of the establishing of a foothold in the European market before 1992. Some of those investment funds which were shifted to Europe may return when the unification process is over in two months. Tai predicted that "Many investors, including the Japanese, will begin to realize that the hype about Europe is far ahead of the reality. The EC-92 euphoria will die down and disillusioned investors will gradually turn back to the states." The Japanese, for example, have been unable to crack the close property cartels of Paris, Frankfurt, Brussels or Berlin. In addition, they are realizing that the quality of the office stock in Europe is far below that of U.S. Class A property.
Led in the past by the English and the Dutch, the Europeans are quite knowledgeable about the U.S. real estate market. Since the late 1980's, however, the United States has obtained less European funding principally because these investors believed that the U.S. dollar was overvalued. Emerging or second tier European banks, such as the regional German banks, will begin to swing the pendulum back the other way as they continue to test the U.S. real estate market waters because of the intrinsic value of Class-A properties in the United States. A renaissance amoung the Europeans, therefore, is inevitable. The relative values in U.S. real estate as measured against the cheap dollar will begin to be compared against the inflated real estate values in Europe. "This astute value perception will be supported by recent deregulation in Europe which will unleash new investors into the U.S. real estate market," commented Tai.
This deregulation will give "European insurance companies and pension funds the opportunity to invest in assets abroad. These investors will see value in the U.S. property markets when they do careful comparison shopping," projected Tai. For example, the Swedish institutional investors are beginning to send study teams to the United States to examine three things. First, they are scouting the principle cities to pick the three or four in which they will concentrate their investments, Second, they are researching how to do business in the fifty different legal systems that govern this country. Third, they are eager to learn about the sophisticated U.S. approach to property management, something that is non-existent in Sweden. "You can expect the first wave of Swedish institutional investment also to appear in early 1992, predicted Tai.
"If there is a "can-do" spirit, it probably lies in spain," said Tai. With options limited at home, the Spanish institutional and commercial companies are looking abroad and to the United States. The investment amounts, however, will not be enormous. Interest in planned communities and mixed-use projects is prevalent among the Spanish.
There will be a gradual return of the institutional investors, both domestic and international, to Class A properties in 1992. "The |Go-Go' markets of the late 80's will be replaced by a more sober and professional approach by lenders and equity investors. Complex, now you see it now you don't investors, they're out.
Simplicity, straight-forward equity structures, they're in," explained Tai.
Value or wealth creation will be driven from sophisticated asset management. As foreign owners become disillusioned with property results, they will no longer be shy about replacing their old American partners with new asset and property managers. "Current income will be very important to property owners as everyone struggles to make their property work or at least appear to work," noted Tai. Unfortunately, however, capital expenditures or other improvements will have to be postponed until owners are satisfied with their income. While some asset managers may be eager to pick up new clientele, the future will hold more demanding, institutional owners.
The Aftermath of the "Go-Go"
This capital shortage in the domestic and global real estate markets will change the face of the industry. Tai stated that to gain funding in the future, investment communities must take the long-term view and overhaul the investment practices of the 80's to develop fiscally sound ventures. "To be successful in tomorrow's market, financing transactions will be structured very differently in order to attract very timid and shell shocked lenders," noted Tai. "In the 'Go-Go' period of the late 80's it was quite alright for banks, credit companies, insurance companies to lend on the basis of aggressive cap rates on speculative projects. These practices are out. Today the new wave will be focused on debt by contractual cash flows, the kind obtainable by adequately preleasing a project," predicted Tai. Land loans and pre-development loans, however, will be impossible to obtain until a balance has been struck between the supply and demand of real estate.
Contractual revenues may not be the total answer. Lenders are increasingly looking for a broader relationship and additional reasons to extend credit. Tai explained, "They seek strong sponsorship from credit worthy entities that are more institutional than start-up/ entrepreneurial, institutions that will clearly survive the shake-out."
Today, however, the fearless, adventurous lenders are not out of business, but they have given way to lending
more conservatively on a club loan basis. Each transaction will be centered around a credible lead lender. "Co-lending is in, solo-lending is out,n declared Tai.
"Every dollar that comes into the U.S. will have a strong and visible multiplier effect on the current depresed psychology that pervades the current U.S. real estate market,n projected Tai. He went on to say that the best owners and managers will be those who can stay realistic about the economics that underlie their projects, and that the survivors will be those owners and managers who can adjust their ways of doing business to reflect the nononsense relationship orientation of lenders and investors.
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|Title Annotation:||land and building|
|Publication:||Real Estate Weekly|
|Date:||Oct 9, 1991|
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