Risk of further losses from exposure to real estate sector: BIS

(BASEL) The body grouping central banks around the world warned yesterday that banks are still worryingly exposed to risks such as falling commercial property prices which are likely to dent their earnings.

‘Despite the improvement in banks’ balance sheets, several factors raise doubts about the sustainability of bank profits,’ said the Bank for International Settlements (BIS) in its annual report.

The so-called central bank for central bankers noted in particular that ‘there is growing evidence that further losses can be expected from exposure to the commercial real estate sector’. Commercial property values in the United States have plunged by a third from their peak and rates of overdue loan payments have risen to more than 8 per cent, said the Basel-based bank.

In European countries like Ireland and Britain, commercial property prices have also plummeted by up to 46 per cent from their peak.

‘Losses on European bank balance sheets are expected to mount over the next few years,’ it said, noting that some banks have in fact been rolling over loans rather than inducing foreclosures, a move that is delaying recognition of losses.

Beyond losses in commercial properties, some banks are also highly exposed to sovereign debt risks, said BIS.

At the same time, with governments also having significant borrowing needs, BIS said banks may find it tougher to obtain refinancing.

Many international banks including Citigroup, UBS and Royal Bank of Scotland suffered from massive writedowns and losses during the financial crisis as their bets on the sub-prime private home loan market soured.

By April 2010, losses or writedowns reported by banks reached US$1.306 trillion, BIS said.

But new capital injected – mostly by governments through special rescue funds – almost matched these losses, reaching US$1.236 trillion.

The BIS groups more than 54 central banks. — AFP

Source: Business Times, 29 Jun 2010

Investors should buy real estate assets and funds that invest in property in the UK and Asia because a potential rebound in prices and economic growth will counter inflation risks, Aberdeen Asset Management Plc said.

While UK properties offer ‘attractive’ yield, real estate in Asia is supported by the strength of the region’s economic growth, Michael Turner, head of global strategy and asset allocation at Aberdeen, said on Tuesday.

He recommended buying into real-estate investment trusts and funds that hold property, without giving specific names.

‘People should allocate more money than they do now in real estate as a hedge against inflation,’ Mr Turner said. ‘Real estate, whether or not there’s inflation as a result of macro policy, is attractive in its own way.’

China, India and Australia have tightened monetary policy to curb inflation as the global economy recovers from the worst recession since World War II. Interest rates in advanced economies can remain accommodative for an ‘extended period’, while policy in ‘a number of emerging economies’ may have to be tightened ‘relatively soon’ because of signs of accelerating inflation or credit booms, the International Monetary Fund said in a Jan 19 staff note.

Minutes from the Australian central bank’s March meeting, released on Tuesday, said that policymakers raised borrowing costs this month for the fourth time in five meetings because the risk of faster economic growth stoking inflation outweighed the potential for renewed financial market turmoil.

In the US, where the housing market is still flat, the Federal Reserve on Tuesday repeated its pledge to keep its main interest rate near zero for an ‘extended period’.

It is a different story in Asia and Britain. UK house prices rose in February at the fastest pace in more than seven years, research group Acadametrics Ltd said on March 12. Nine of 10 Britons say that buying a home is a ’sensible investment’ even after the nation’s worst housing slump in three decades, a survey by YouGov Plc published on March 2 showed.

In Asia, property prices have risen as economic growth in the region outpaces the rest of the world’s. Hong Kong’s home prices surged almost 30 per cent last year, Centaline Property Agency Ltd said this month. Australian home prices jumped 13.6 per cent in 2009.

The World Bank forecast in January that the global economy would expand 2.7 per cent this year. China’s economy, the world’s third biggest, will top last year’s 8.7 per cent growth rate in 2010, the nation’s central bank estimated this month.

Singapore’s gross domestic product is forecast by the government to grow between 3 per cent and 5 per cent this year.

Source: Business Times, 18 Mar 2010

But for 21% of investors Asia is the target, says survey

European property investors are focusing on opportunities in their region in 2010, with many seeing the rising UK, German and French markets as the most attractive, a CB Richard Ellis survey said yesterday.

Of 271 investors polled, 60 per cent said they were planning to invest in Europe, 21 per cent are looking to Asia, and 12 per cent in North America, CBRE said in the report, released at the MIPIM property trade fair at Cannes, France.

‘This European preference is probably not surprising given that the vast majority of respondents are based in, and predominantly invest within, the region,’ Nick Axford, head of EMEA research and consulting at CBRE, said.

‘However, it is noteworthy that 40 per cent see the best opportunities lying elsewhere, with Asia a clear target for many,’ he said.

Of those investing within Europe, 31 per cent pick the UK as the most attractive market, with France and Germany equally preferred by 18 per cent. Another 17 per cent were looking further east, towards Central and Eastern Europe, the survey showed.

‘As yet, investors see fewer opportunities in the distressed Spanish market, perhaps believing that the window for entering this market will remain open for longer here than elsewhere,’ CBRE said.

Offices are the most attractive target to 39 per cent of investors, while 34 per cent preferred retail properties, in particular shopping centres.

The survey showed more than half of the respondents believed the risk of a ‘double dip’ recession or a weaker-than-expected recovery in occupier demand posed the biggest threats to the property market, CBRE said.

Fears of forced sales by banks and debtors – a key investor concern last year – appears to have ebbed however, it said.

‘Respondents are right not to be too concerned . . . the support . . . from governments and asset protection schemes will help to extend the period over which problem debt can be tackled,’ Philip Cropper, CBRE executive director of real estate finance, said.

Source: Business Times, 18 Mar 2010

The number of commercial property sales in Europe climbed by more than a third in the fourth quarter, the fastest pace in three years, as cash-rich buyers returned to the market, according to CB Richard Ellis Group.

More than 1,100 transactions were completed throughout Europe, 36 per cent more than in the third quarter and 52 per cent more than a year earlier, the Los Angeles-based property broker said yesterday.

That’s about 75 per cent of the number at the market’s 2007 peak.

The sizes of transactions have also grown as investors that raised cash, including German property funds and sovereign wealth funds, compete for properties.

There were 24 purchases for more than 200 million euros (S$390.4 million) in the second half of last year, triple the number in the first half, CB Richard Ellis said.

‘There has been a significant increase in the average lot size,’ CB Richard Ellis said in the statement. ‘The combination of the recovery in values and ability of investors to complete larger transactions has driven this average up.’

Buyers’ access to debt was a crucial factor in the success of deals, the company said.

The average European sale was 23 million euros in the fourth quarter, according to the report. That compares with 49 million euros at the market’s peak in the third quarter of 2007, when there were 62 purchases for more than 200 million euros.

The total value of commercial property transactions was 25.7 billion euros in the final three months of last year, a 42 per cent increase from the previous quarter, the broker said on Jan 18.

That included one billion euros spent by German funds in December, in 13 acquisitions across seven countries.

Source: Business Times, 11 Feb 2010

Habtoor Group, a stakeholder in Barclays plc, has hired Rothschild to identify five-star hotel targets in Europe, its chairman said yesterday.

The conglomerate, one of the United Arab Emirates’ largest family businesses, is also aiming to win up to US$8.2 billion worth of building contracts this year with Australia’s Leighton Holdings.

Habtoor, which owns hotels in the UAE, was one of several Middle East investors that bought into Barclays in 2008 as the lender looked to boost its capital to weather the global financial crisis.

‘We talked with Rothschild bank . . . about investment in Europe and especially in London and Paris for hotels if there is anything they can find so they are looking for us,’ billionaire Khalaf al-Habtoor said in an interview.

He added that the group was also looking at companies which want to sell their assets due to a lack of financial liquidity.

Mr Habtoor said in August that the group had about US$1.3 billion to invest in Europe.

The group, which rivals Dubai’s largest contractor Arabtec, has a joint venture with Leighton and has said it may float its engineering unit or the entire group in the third quarter of 2010 with possible listings in Dubai and London.

Mr Habtoor declined to comment on the potential initial public offering yesterday.

The construction firm is working on about 27 billion dirhams (S$10.3 billion) of projects in the United Arab Emirates at present and expects to bid on about 40 billion dirhams worth of projects in Abu Dhabi alone this year, Mr Habtoor said.

‘We are expecting this year that we have to grab a minimum of 25-30 billion dirhams in projects,’ he said.

The company also expects to boost its presence in Qatar as it looks to diversify revenues away from its home market.

Source: Business Times, 26 Jan 2010

A slower correction in mainland European property values has turned tens of billions of euros of mortgage-backed bonds into potential time-bombs with a greater risk of defaulting than their UK peers, Fitch Ratings said.

The agency has so far this year downgraded 47.2 billion euros (S$97.7 billion), or 69 per cent, of European commercial mortgage- backed securities (CMBS) notes that it tracks, and maintains either Rating Watch Negative or Negative Outlook on a further 52 billion euros of notes.

It said that refinancing risk for CMBS linked to French, Dutch or German real estate may be even greater than in Britain because so many transactions were completed at the peak of a property boom in 2006 and 2007.

UK real estate prices have rallied after falling almost 45 per cent in the two years to September, but Fitch senior director Euan Gatfield said that continental European markets may be lagging, with further declines likely to collide with a wave of impending maturities over the next five years.

‘There is hope that the worst is over for UK commercial real estate, something that cannot be said for most mainland European markets,’ Mr Gatfield said.

‘With a prolonged wave of maturities arriving in two years time, financing pressures are building in the sector,’ he said.

Negative rating action has been concentrated in European CMBS without UK exposure, despite the fact that few borrowers have yet to deal with a loan maturity in European CMBS.

Although less than 5 per cent of European CMBS loans have suffered a missed payment, Fitch said that the growing number of financial covenants in breach of their terms has foreshadowed the difficulties that even performing borrowers will face when repayment is due.

Fitch said that about five billion euros of CMBS are due to mature in 2010, followed by 61 billion euros between 2011 and 2014, with a third of securities falling due in 2013. Some 13.5 billion euros worth of German CMBS loans are set to mature in 2013, including 10 billion euros from just four multi-family housing mortgages, twice the UK’s peak of 6.6 billion euros projected for 2012.

Source: Business Times, 26 Nov 2009

After seeing record growth this year, Frasers Hospitality is setting its sight on even more ambitious expansion for next year and beyond.

The serviced apartment arm of conglomerate Fraser and Neave (F&N) opened 740 units worldwide this year, bringing its total to about 5,000 in 20 cities. The latest is Frasers Suites Edinburgh.

Located in St Giles Street, off the Scottish capital’s famous Royal Mile, it houses 75 luxury suites in a historic 130-year-old building that used to belong to the local city council.

On a rainy evening last Wednesday, bagpipes heralded the official launch of their second property in Scotland – a homecoming of sorts as the founders of F&N were both Scotsmen.

And Frasers Hospitality will continue expanding its network, even in the uncertain economic conditions, its chief executive Choe Peng Sum told The Straits Times.

Frasers, whose average occupancy rate is holding steady at 80 per cent, is planning to double its residences to more than 10,000 by 2012.

The company had started with only two properties in Singapore in 1998.

While it may seem unusual to expand so aggressively during the global slump, the correction of property prices has actually thrown up opportunities, especially in Europe, said Mr Choe.

In London, for instance, property prices have dropped by about 30 per cent, after rising constantly in the last decade.

The company already has eight properties in London, as well as two in Paris. Other European destinations that might soon find themselves in Frasers’ cluster include St Petersburg, Prague and Berlin.

But Mr Choe feels there is still potential for growth for serviced apartments, as many countries do not provide enough of them. ‘There’s a pent-up demand, but the apartments must be well done.’

The only major continents that Frasers has not set up shop in is the Americas.

Mr Choe noted that North America, being a pioneer of serviced apartments, is not easy to break into while South America is simply too far away.

But he is not ruling out any possibilities, and added that Frasers is looking at New York and Sao Paulo or Rio de Janiero as their first ventures in those continents.

Source: Straits Times, 24 Nov 2009