The EconomistJune 27th 2020 Finance & economics 592 also force firms to spread out more, revers-
ing a trend that saw office space per em-
ployee fall by half in a decade. If the net ef-
fect were a reduction in rented space, it
could cause havoc. Victor Calanog of
Moody’s, a rating agency, calculates that if
tenants in New York gave up even 10% of
their space over the next five years, it could
result in a halving of rents sought on va-
cant properties.
Meanwhile, the shift to remote shop-
ping and working presents investment op-
portunities. Storage and distribution facil-
ities remain geared towards industrial use
rather than pick-and-pack. Brian Chinappi
of Actis, a London-based private-equity
firm, says the crisis has made it even hun-
grier for data centres, which it is now build-
ing in Asia and Africa.
The writing on the wall
Assessing the extent of potential losses
from the crisis is hard. Britain’s financial
watchdog thinks uncertainty on values is
so strong that it has forced listed funds to
suspend redemptions. Analysts canvassed
by The Economistreckon property values
will fall by less than 20% overall this year,
and rents by 5-10%. That compares with
falls of 25% and 10-20%, respectively, in
2008-09. But a lot depends on how long
rent suspensions last. msci, an index pro-
vider, estimates that assets subject to a six-
month rent holiday and a recession could
lose 37% of their worth. reitprices suggest
retail properties could have further to fall.
Figuring out who will bear those losses
is even tricker. Laws differ as to whether
creditors or equity holders should get pre-
ferred treatment, with the former favoured
in Europe and the latter better protected in
America. Most important, ownership of
property assets is “a big, complicated web”
that cannot easily be untangled by outsid-
ers, says a consultant. Property vehicles are
often owned by large asset managers that
aggregate pension-fund money from all
over the world. Despite improvements in
disclosures, private funds remain opaque.
Lenders are not always best-in-class either.
“Try getting a French bank to reveal its
property-type breakdown for commercial
real-estate lending,” says one analyst.
What seems clear is that banks are in a
sounder position than during the financial
crisis. Loan-to-value ratios were below
60% at the end of 2019, compared with 70%
in 2007, so there is more equity to absorb
drops in values, says Richard Bloxam of jll,
a property consultancy. Banks’ capital buff-
ers are bigger. In Americacmbss can cata-
lyse credit crunches, because property
lenders often use them as collateral to fi-
nance more loans. But these account for
15% of total property debt, down from over
50% in 2007. And they have held up well so
far, thanks to purchases by the Federal Re-
serve. (The Fed’s programme, which ex-cludes newly issued cmbss, expires on Sep-
tember 30th.)
A more diverse lending universe,
though, means more entities are exposed
to potential losses—including institution-
al investors, which have piled $235bn into
specialist private property-debt funds
since 2008. Some funds are already strug-
gling to repay the short-term debt they
have raised against long-dated assets. Big-
ger shocks may well occur when batches of
loans mature. Britain faces a £43bn ($53bn)
commercial-property refinancing wall in
2020-21; America’s is worth $2trn over the
next five years.
Such losses notwithstanding, inves-
tors’ love affair with commercial property
is unlikely to be at an end. Interest rates in
the rich world are close to zero, if not below
it, and going nowhere. The spread between
real-estate and government-bond yields is
still alluring. Private-equity firms’ moun-
tains of dry powder—now worth a third of
assets under management, the highest
since 2010—will put a floor under values.
But those who once blindly piled in arelikely to think twice. The result could be a
more discerning investment approach. In-
stitutional investors could become more
cautious, favouring targets like housing
blocks or prime offices that provide long-
term secure income; more money seems to
be chasing a shrinking pool of “defensive”
assets, which could push prices up further
and dampen yields. Some will hedge their
bets. Alisa Mall of the Carnegie Corpora-
tion of New York, a $3.5bn endowment
with a 10.5% allocation to property, says it
wants to add generalist managers who can
invest across sectors and geographies to its
portfolio of “sharpshooter” specialists.
Yet others, mostly private real-estate
funds, hope to swoop on bargains (most
public vehicles are trading below their un-
derlying asset values). Craig Duffy of glp, a
private-equity firm based in Singapore
with a vast portfolio of warehouses, says
the firm has $7bn of dry powder to deploy,
and hopes to raise another $8bn-9bn by the
end of 2020. Some will focus on debt at a
time when liquidity to stretched borrowers
comes at a premium: Skardon Baker of
Apollo, a firm that invests in distressed as-
sets, says its European opportunistic fund
has deployed €500m in the past 12 weeks.
The big winners will probably be giant
firms like Brookfield, which closed a $15bn
fund last year, and Blackstone, which
raised a record $20.5bn vehicle a few
months later. They have war-chests allow-
ing them to command price discounts by
buying bundles of assets at once. And they
are among the few firms with the develop-
ment skills needed to turn buildings
round. Ever greater demand for their ser-
vices may allow them to charge hefty fees,
on ever bigger sums. Pension funds and in-
surers are becoming warier of commercial
property. But for private-equity barons it
remains a giant moneymaker. 7On rent strike
United States, commercial-mortgage-backed
securities, delinquency rate* by property type,%Source:Trepp *Loans 30 daysormorepastdue42520151050
2017151311092007RetailOfficeLodgingOverall IndustrialBooking losses