September 20, 2016

The Argument For Demand Exceeding Supply Is Unfounded

A report from Bloomberg on China. “China’s attempts to slow runaway home-price growth in major cities are showing little sign of success, stoking the threat of a housing bubble that could destabilize the economy. Home prices rose in 64 of 70 cities tracked by the government, up from 51 the previous month. Shanghai prices surged a record 4.4 percent for a year-on-year gain of 31 percent, while Beijing’s climbed 24 percent from a year earlier. ‘The more immediate risk of a sudden and steep downturn in the economy comes from the threatened bursting of the property market bubble,’ Pauline Loong, managing director at research firm Asia-analytica in Hong Kong, wrote in a report. ‘And bubble it is. The real question for investors is when and what will pop the bubble?’”

“One difficulty in reining in the home-buying frenzy is the larger leverage residents used through commercial banks with a growing appetite on mortgage loans, JPMorgan Chase & Co. analysts led by Zhu Haibin wrote in a note. Buyers in second- and third-tier cities are able to obtain the same mortgage discounts as in largest hubs, normally between 10 to 15 percent, a sign that a liquidity surge has backed up the rally, Nomura’s Gao said.”

“‘What’s different in the current round of credit easing is even home purchase in third-tier cities enjoyed a relatively large discount,’ Gao said, citing Guizhou province. ‘This is a strong signal of a widespread ease in credit.’”

The New Zealand Herald. “It’s becoming harder for Aucklanders to borrow money for a new house if they haven’t already sold their current home. Mortgage brokers say they have noticed banks are tightening their lending conditions - a direct result of a cooling of the hot property market where there has been a big drop in houses available for sale, and fewer homes selling at auctions.”

“East Auckland mortgage broker Bruce Patten said he was getting about 12 calls a week from people having trouble getting bridging finance from their banks to buy a new home before selling their old one. ‘With auction clearance rates starting to drop they run the risk of being left with two houses and big debts, or selling for less than expected and a much larger debt,’ he said. ‘I think the banks think that things have peaked and that is why they are pulling back.’”

“Hayden Broadbelt of Elite Auctioneers, which runs auctions for several real estate firms across Auckland, said auction clearance rates had dropped to the same levels as October last year when the banks were adjusting to the first LVR tightening. Although 72 per cent of properties in South Auckland were still selling at auctions, clearance rates were only 60 per cent in central and East Auckland and 55 per cent on the North Shore.”

“‘The numbers of people bidding are reducing,’ he said. ‘There are still a lot of people attending auctions, and we are seeing properties sell 24 to 48 hours afterwards, but there is actually a gulf at the moment between owners’ expectations and what the [buyer] is prepared to pay.’”

The Australian Financial Review. “After high level of construction activity since the late 2000s, with multi-unit residential commencements rising by 6.8 per cent a year over the five years to 2016-17, developers - particularly in Melbourne and Brisbane - are now holding back developments and delaying project starts due to an oversupply of products. Developers and owners of projects have ’started slashing prices of apartments,’ according to the Multi-Unit Apartment and Townhouse Construction in Australia report.”

“The construction of apartments in the major Australian cities will slow down heavily in 2017 and 2018 as the apartment industry heads into a correction, according to a report by IBISWorld. ‘The industry has moved into a sharp cyclical correction in the current year, stemming from the recent completion of several large-scale developments and the accumulation of unsold and unleased apartments. The industry is in the midst of a sharp correction that is expected to continue through to a deep cyclical trough in 2017/18.’”

“As the industry picks up again after 2016/17, the strongest returns will come from large-scale developments of up-market apartment complexes in Sydney and Brisbane, particularly riverside, harbour-side and themed developments. ‘However, the majority of multi-unit housing developments are likely to be valued near the lower end and rental market, well below the average values of the late 2000s,’ the report warns.”

The Vanguard in Nigeria. “Amid increasing glut in the Nigeria’s property market as a result of the economic recession currently facing the country, the Chief Executive Officer of Sujimoto Construction Limited, a Lagos-based real estate development company, Mr. Sijibomi Ogundele, has revealed that the surge in the number of empty apartments in Ikoyi, Lagos, is due to over pricing.”

“Ogundele added that this disturbing phenomenon must have prompted the well-informed and educative research publication of economy watch, Financial Derivatives Company Limited recently, which informed that ‘The number of vacant properties in the upper class real estate neighbourhoods of Lekki, Victoria Island and Ikoyi has risen by 72 percent over the last 18 months.’”

“Describing the situation as a case of quality versus quantity, said ‘A developer who compromises on quality of materials, no matter how highbrow the property’s location, has no right to place an exorbitant price on it. Thus, the argument for demand exceeding supply, as far as empty apartments in Ikoyi go, is unfounded.’”

“‘While the cost of a nice three-bedroom apartment in Johannesburg would go for about $350,000, the same apartment in Ikoyi would want $1 million. If the cost of construction materials is the same all over the world, the price of marble, granite, cement, tiles, kitchen, doors, paints etc, why is cost in Nigeria about 300 per cent higher?’”

“‘With the oil price plummeting, and major economies across the world experiencing down turn, individuals and organizations no longer have loose money to throw around. And with the current downsizing by companies, prospective tenants demand full value for their hard-earned money.’”

A Canary Which Is Starting To Lose Oxygen

A report from the New York Real Estate Journal. “Overall capitalization rates (cap rates) are always the topic of discussion in real estate appraisal circles. We are still in the midst of some of the most historically low cap rates in modern history. The cap rates are directly related to the lowest interest rates in my 43 years as an appraiser. The effect of the low interest rates has driven one of the most active real estate market in 30 years in the northeast United States. This is especially true in New York City where real estate values are exploding. Of course some of the older buildings like One Seneca Tower had some functional obsolescence because of age and had 850,000 s/f of space which makes it a large fish in a small pond. I use this as example similar to that of a ‘canary in a coal mine’ which is starting to lose oxygen.”

“The point is; without more than low interest rates the success of smaller markets is dubious if there is not an influx of international capital, jobs and population. The Federal Reserve Bank headed by Janet Yellen is expected to increase rates before the end of the year ever so slightly which should result in continued low cap rates which will keep sales activity and prices relatively high even in the secondary markets.”

“However, the Federal Reserve has some of its own problems. Their holdings of U.S. treasuries, etc. are approximately $6 trillion. This is an increase of over 600% over the past 7 years. Some think this is a house of cards or type of Ponzi scheme; and is a policy which is not on solid financial ground. However, this strategy has kept interest rates artificially low which not only has encouraged borrowing for new projects but also boosted the stock market to record highs and real estate cap rates at all time lows.”

“One thing is for certain; real estate activity is still at near record levels in the big markets and smaller metropolitan areas in part because of low interest rates and government intervention for the foreseeable future. However, look out for the ‘canary in the coal mine’ example like Seneca Tower in your local market which may fuel a major change in Federal Reserve policy and cap rates.”

From Bloomberg. “Heightened scrutiny of U.S. commercial real estate lending is paving the way for lightly regulated investors to gain a bigger toehold in lucrative deals. Private funds are seeking a record $32 billion for commercial-property debt as buyout firms, real estate investment trusts and hedge funds expand lending. These companies, which typically charge higher interest rates, can move quickly on large loans that may be seen as too speculative for banks.”

“With banking regulators warning of a potential real estate bubble, firms such as Blackstone Group LP and Starwood Property Trust Inc. stand to become an even larger force in the market. So-called shadow banks — lenders that fall outside of the industry’s oversight — are able to take on more risk amid calls for caution in an area that melted down during the 2008 financial crisis.”

“The record capital being sought by U.S. private funds for real estate debt investment as of July was up almost 40 percent from a year earlier, according to data researcher Preqin Ltd. Banks, by contrast, are pulling back as slowing global economic growth, uncertainty over interest-rates increases and pockets of overbuilding spark concern that commercial real estate prices are due for a fall after almost doubling in six years.”

“In Manhattan, where a surge of construction has led to a glut of luxury apartments, Blackstone extended a mortgage originally made for $285 million on a condominium tower being built by Gary Barnett’s Extell Development Co. when the developer couldn’t pay off the loan on its Aug. 9 due date. Nonbank lenders ‘trust their own instincts,’ said Steven Delaney, an analyst with JMP Securities LLC. ‘Blackstone is the largest owner of real estate in the world,’ he said. ‘They don’t need regulators and the Fed to tell them what the state of the real estate market is.’”

The Philadelphia Inquirer. “With a 7 percent increase from August 2016 to September 2016, Philadelphia is third on a list that only landlords could like. According to rental agency Abodo, the hike puts Philadelphia on a list of U.S. cities where rent has increased the most, second only to Bakersfield, California and Miami, Florida. The same report indicated big dips in Seattle (down 13 percent) and San Jose, California (12 percent).”

The San Francisco Business Journal in California. “San Francisco is seeing fewer market-rate housing proposals as rents have softened and a major policy change more than doubled the affordable housing requirement, according to an analysis of city planning data. The slowdown is a sign that the city’s real estate boom may be fading even as the city pursues more concessions from developers to fund affordable housing.”

“A Socketsite analysis of the city’s development pipeline in August found that the number of units proposed, approved and under construction fell slightly by 100 to 63,300, as new applications fell relative to completed projects. Companies that track rental prices such as Apartment List and Zumper have also reported dips in the past few months in San Francisco rents.”

“‘I will say that as a result of (Prop. C), the land market for residential housing is kind of locked up right now. We’re in the market every day, and it’s very difficult to transact,’ Jesse Blout, principal of developer Strada Investment Group, said at the Business Times’ San Francisco Structures event last week. ‘Part of that is because land owners are used to a certain level of pricing.’”

“The city’s current housing production is still near a record high and outpaces previous cycles of growth, and supporters of more development say that increased supply gas helped lower rents for the high end of the market. Major landlords such as Equity Residential have offered new renter concessions such as a free month of rent as thousands of new units have been completed in the South of Market and Mission Bay neighborhoods.”