There were many reasons for the 2008 financial crisis. Blame is often laid at the door of the subprime crises in the USA. But look deeper and some point to Bill Clinton repealing the Glass Steagal Act, which in turn, it is suggested, was a response to a lack of meaningful wage growth in middle America.
Such reductionism isn’t always helpful, even if it is understandable when the human mind craves to impose a narrative on chaotic events and legions of commentators justify their existence on posthoc rationalisation.
The simple truth is the entire edifice fell down on a lack of trust.
“It is probably easier to predict what will happen on October 31 than it is for the average investor to raise meaningful debt”
What actually makes up the alphabet soup we have created, traded and now own? CMBS (commercial mortgage-backed security), CDOs (collateralised debt obligations), RMBS (residential mortgage-backed securities)… what the hell is it all worth? The answer turned out to be not a lot.
It is not stretching the point too far to say we are in a similar crisis of faith and trust in the retail property industry.
Lack of understanding
Dusting off my textbooks from Oxford Polytechnic tells me a capital value is based on the perceived worth of a future income stream. This, in turn, is made up of the length of income, the perceived strength of ’covenant’ and potential for growth. Very straightforward. But if it is that simple, why do major retail property companies trade at unprecedented discounts to net asset value?
Who do you trust – the valuers or the equity analysts?
On a direct real estate basis, how can a bank make an objective decision on value when CVAs make lease commitments discretionary, the ability to pay subjective and when the quantum of rent reduction reported to the press is more important than fair value being achieved.
“29% rent reduction? I’m getting 40%!” says latest high street stalwart.
I don’t claim to have the pre-crash foresight of Nassim Nicholas Taleb or even Sir Vince Cable, but I have suggested previously how this would play out and it has. A lack of understanding of what good looks like results in a lack of trust in values, which means a lack of debt; a lack of debt means values fall, which leads to…
It is probably easier to predict what will happen on October 31 than it is for the average investor to raise meaningful debt. As a result, prices continue to fall.
So what? Many of you will be thinking, and as I have written previously, no one sheds a tear for property owners. But falling values to this extent will result in a lack of much-needed investment in physical assets, insolvent asset owners not paying business rates into the coffers of local government and the money required to repurpose the physical fabric of our towns and cities will be postponed.
None of which is great for what is – and will remain to be for the foreseeable future, according to Revo’s research – the main sales channel for Retail Week’s readership, nor of course for the communities we are all invested in, financially and emotionally.
However, I’m delighted to say that the lending industry gets it and leading members of their representative body CREFC Europe are going to debate the issues with some of our own members at Revo Liverpool on 17-19 September.
“Lenders should look to appraise shopping centres as operating assets rather than fixed income streams”
The goal is to find a way to build trust back into the system and find a way of appraising value that reflects the changing form, function and importance of physical retail in an evolving market.
My own view, rather than a Revo policy, is that lenders should look to appraise shopping centres as operating assets rather than fixed income streams. Who cares what the rental ‘tone’ is? It’s the total cash flow that counts. It would incentivise owners to manage costs downwards as much as rents upwards.
As well as rewarding the good asset operators, there would be better alignment of interest between owners and occupiers, and flexible occupation would not be penalised, individual rents could go up and down.
Sounds good, doesn’t it?