Where has all the Liquidity Gone?

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Where has all the Liquidity Gone?

  1. 1. 6 - 9 October 2008 Dubai International Exhibition Centre The world‟s largest business to business real estate investment and development event Where has all the liquidity gone? Eric Stoclet Group Executive Director www.cityscapeglobal.com
  2. 2. Table of Contents May you live in interesting times… Which real estate markets? Is there any money out there? What‟s a person to do? Friday, February 06, 2009
  3. 3. May you live in interesting times… > Taken over or Government > Roskilde Bank bailed out by > Fortis bailed out by Benelux > Real estate projects halted as credit crunch nationalized: Northern takes over consortium of banks governments pushes rates up Rock, HBoS, Bradford Glitnir Bank, > Denmark in recession > Dexia bailed out by Belgium > 17/9/08: government to lend 3largest banks - & Bingley,… country‟s 3rd Sberbank, VTB, and Gazprombank - up to USD > USD 27 billion largest 44 billion for a minimum of 3 months Sigma Finance Corp. > 17/09/08: RTS index halts trading after a drop stops trading and may of 6% go into receivership > State-owned Vneshekonombank to loan up to > Commercial real $50 billion to Russian companies to pay back estate drops 8.6% in foreign debts the first six months of ‟08 as housing drops Government 12.4% in last 12 guarantees all months Government bank deposits 29/09/08: Bank of Japan guarantees injects 1.9 trillion yen ($17.9 all private billion). deposits > Tourism spending down 30+% > Real estate crisis main cause for 11.3% jobless rate UAE central bank to offer banks short-term Credit Agricole to funds through a 50bn- cut 500 jobs as dirham facility profits fall 94% > Financial sector contribution to GDP Kuwaiti central bank drops 45% between injects USD 300+ million 9/29/08: trading Q1 and Q2 ‟08 short-term liquidity halted as Bovespa > UBS takes USD 40+ drops 9.75% billion write downs > 29/9/08: stock market down st > Taken over or nationalized: Bears Stearns, Lehman 4% in 1 15 minutes of trading HKMA to provide liquidity Brothers,Merrill, Fannie Mae, Freddy Mac, AIG,IndyMac, > 29/09/08: Reserve Bank of assistance on request from WaMu, Wachovia… Australia adds A$2.72 billion licensed banks for a period of > Licking their wounds: Citigroup,… > Government negotiates ($2.3 billion) with more than up to six months > Running for cover: Morgan Stanley, Goldman Sachs,… EYR 50 billion bail out of A$2 billion a day on average nd > 9/29/08: single biggest point drop ever for the Dow: Hypo Real Estate AG, 2 pumped in since Sept. 15 777.68 points largest commercial property > USD 25 billion government loan to automakers lender > USD 700 billion government bailout of “Wall Street”??? > Government guarantees all > Housing drops over 30% in certain areas private deposits > 159,000 jobs lost in September, 760,000 lost so far in „08 Source: Bloomberg, Reuters, Zawya,, Gulf News, The Wall Street Journal, Noor Islamic Bank PJSC
  4. 4. May you live in interesting times… ∞ USD 590.5 billion write downs ∞ USD 352.5 billion capital raised Firm - Writedown & Loss/ Capital Raised Citigroup Inc. - 55.1/49.1, Merrill Lynch & Co. - 51.8/29.9, UBS AG - 44.2/28.1, HSBC Holdings Plc - 27.4/3.9, AIG – 25.0/20.0, Wachovia Corporation - 22.7/11.0, Bank of America Corp. - 21.2/20.7, Lehman Brothers Holdings Inc. - 18.2/13.9, Freddie Mac - 18.0/13.5, IKB Deutsche Industriebank AG - 15.1/12.5, Washington Mutual Inc. - 14.8/12.1, Royal Bank of Scotland Group Plc - 14.6 /23.8, Morgan Stanley – 15.7/15.6, JPMorgan Chase & Co. - 14.3/9.5, Fannie Mae – 12.7/6.0, Deutsche Bank AG - 10.6/3.2, Credit Suisse Group AG - 10.4/2.7, Ambac – 10.3/1.5, Barclays Plc - 10.1/18.3, Wells Fargo & Company - 10.0/4.0, MBIA Inc. – 9.4/1.1, Credit Agricole S.A. - 7.9/8.7, Fortis - 7.3/7.1, Bayerische Landesbank - 7.1/0.0, HBOS Plc - 7.0/7.4, ING Groep N.V. - 6.8/4.7, Societe Generale - 6.7/9.6, Canadian Imperial Bank of Commerce - 6.3/2.8, Mizuho Financial Group Inc. - 5.9/0.0, National City Corp. - 5.4/8.9, Indymac Bancorp Inc - 4.9/0.0, Lloyds TSB Group Plc - 4.9/4.9, WestLB AG - 4.7/7.4, Dresdner Bank AG - 4.0/0.0, BNP Paribas - 3.9/0.0, Landesbank Baden-Wurttemberg - 3.8/0.0, Goldman Sachs Group Inc. - 3.8/10.6, E*TRADE Financial Corp. 3.6/2.4, Nomura Holdings Inc. - 3.3/1.1, Natixis - 3.2/6.6, Bear Stearns Companies Inc. - 3.2/0.0, HSH Nordbank AG - 2.7/1.9, Landesbank Sachsen AG - 2.6/0.0, UniCredit SpA - 2.5/0.0, Commerzbank AG - 2.3/0.0, ABN AMRO Holding NV - 2.3/0.0, Bank of China Ltd - 2.0/0.0, DZ Bank AG - 2.0/0.0, Fifth Third Bancorp - 1.9/2.6, Bank Hapoalim B.M. - 1.7/2.4, Rabobank - 1.6/0.0, Mitsubishi UFJ Financial Group - 1.6/1.5, Royal Bank of Canada - 1.5/0.0, Marshall & Ilsley Corp. - 1.4/0.0, Alliance & Leicester Plc - 1.3/0.0, U.S. Bancorp - 1.3/0.0, Dexia SA - 1.2/0.0, KeyCorp -1.2/1.6, Groupe Caisse d'Epargne - 1.2/0.0, Hypo Real Estate Holding AG - 1.2/0.0, Sovereign Bancorp Inc. - 1.0/1.9, Gulf International Bank - 1.0/1.0, Sumitomo Mitsui Financial Group - 0.9/4.8, Sumitomo Trust and Banking Co. - 0.7/1.0, DBS Group Holdings Limited - 0.2/1.1, Other European Banks - 7.4/2.2, Other Asian Banks - 5.5/7.8, Other US Banks - 2.9/1.9, Other Canadian Banks - 1.8/0.0 Sources: Bloomberg – 20/9/08, Reuters – 10/9/08, Noor Islamic Bank PJSC ∞ USD 700 billion bailout, FDIC limit increase to USD 250,000… whatever the package, does it mark a bottom or just a stop on the way down? ∞ Financial markets operating on a “who‟s next” basis ∞ Decoupling? What decoupling? US represents 25.4% of World GDP Friday, February 06, 2009
  5. 5. May you live in interesting times… It all started with housing Source: Standard & Poors ∞ US housing market still taking hits though some areas seem to have bottomed out (Dallas,…) ∞ Uptick in mortgage rates and tight underwriting criteria will dampen any recovery Friday, February 06, 2009
  6. 6. May you live in interesting times… Confidence crisis Source: Bloomberg, University of Michigan, Conference Board, National Federation of Independent Business Source: Bloomberg ∞ US domestic confidence at or close to lowest in past 20 years ∞ US CDS market, practically inexistent prior to 2007, now at 26 bps for 5 years and 28 bps for 10 years denoting deteriorating external confidence Friday, February 06, 2009
  7. 7. May you live in interesting times… Confidence crisis Source: Bloomberg ∞ 10/03/2008: 288 bps, uncharted territory ∞ ``We will learn that this crisis has come to an end'' once the gap between the London Interbank Offered Rate and the overnight index swap rate narrows to 50 basis points – Alan Greenspan Friday, February 06, 2009
  8. 8. May you live in interesting times… Is there light at the end of the tunnel? ∞ From S&P/Case Schiller index high in 10/89, 8.3 years to recover (01/98) ∞ From University of Michigan confidence index high in 09/88, 8.3 years to recover ∞ From unemployment 03/89 low of 5%, 8.2 years to recover (05/97) ∞ Maximum level of unemployed: 06/90 -10.0 m (7.8%); 08/08: 9.5 m (6.1%) Friday, February 06, 2009
  9. 9. May you live in interesting times… Is there light at the end of the tunnel? Indicators are Source: US Bureau of Labor Statistics Source: US Census Bureau, Noor Islamic Bank PJSC not positive… Source: US Census Bureau Source: Bloomberg, Friday, February 06, 2009
  10. 10. May you live in interesting times… Meanwhile in the GCC: Credit crunch? What credit crunch??? Source: Central Bank of the UAE Source: Central Bank of the UAE Friday, February 06, 2009
  11. 11. May you live in interesting times… Signs were there… Source: Barclays Capital ∞ Until recently only visible in ever increasing spreads ∞ Liquidity in the UAE was supported interalia by speculation on AED depegg Friday, February 06, 2009
  12. 12. May you live in interesting times… Credit crunch now officially here ∞ Regulators: September 2008: UAE Central Bank avails AED 50 billion facility for banks operating in the UAE ∞ Interbank: One-month UAE interbank offered rate 4.51875% (06/10) up from 2.0125% in June ∞ Corporates: “The availability and cost of credit are critical issues that impact everyone. The Gulf region is not immune from the fallout of the sub-prime crisis and the consequent global credit squeeze.” Robert Lee, Managing Director, Investment Projects, Nakheel (Khaleej Times 28/09/08) ∞ News: Gulf News, 27/09/08: Friday, February 06, 2009
  13. 13. May you live in interesting times… Source: Bloomberg, Source: Bloomberg, Source: Bloomberg, Source: Bloomberg, Friday, February 06, 2009
  14. 14. May you live in interesting times… Source: Bloomberg, Source: Bloomberg, Source: Bloomberg, Drop from „07 close: ADSMI -25.4%, ADRE -46.5% Drop from „07 close: DFMGI -43.2%, DFREALTY -55.8% Drop from „07 close: SASEIDX -43.3% Source: Bloomberg, Source: Bloomberg, Source: Bloomberg, Source: Bloomberg, Drop from „07 close: DSM -15.0% Drop from „07 close: BHSEASI -13.5% Drop from „07 close: KGGIGEN -21.9% Drop from „07 close: MSM30 -21.0% Friday, February 06, 2009
  15. 15. Which Markets? ∞ Value of planned and ongoing real estate and construction projects in GCC: USD 1.3 trillion or 150% of 2007 GDP (MacKinsey) ∞ Saudi Arabia has internal needs and financial wherewithal to support further development ∞ UAE developed rapidly, heavily focused on tourism and financial services; AED 50 billion estimated financing requirements for 2009 ∞ Qatar focusing on education and financial services Friday, February 06, 2009
  16. 16. Which Markets? ∞ No market can stay immune from crisis currently roiling the world as it reduces access to financing and makes it more expensive ∞ Sentiment has turned from unquestionably bullish to more muted:  Standard Chartered, July 24, ‟08, Dubai – A tale of two housing markets ; “…long term outlook … is positive” but “…signs of excessive short term speculative activity … can prove to be destabilizing”  Morgan Stanley, August 4, ‟08, MENA – Property Report: Preferred markets: Abu Dhabi, Saudi Arabia, Qatar  Samba Report on Dubai Real Estate, September „08: quot;Soaring property price increases over the [past] five years, have attracted increasing supply, which will eventually exceed demandquot; Friday, February 06, 2009
  17. 17. Which Markets? ∞ Despite credit crunch, investors remain guardedly positive  DIFC Investments launches AED 12 billion realty and infrastructure fund to focus on Dubai and UAE ∞ GCC markets and sub-markets at different levels of development though currently enjoying high levels of occupancy across all product types ∞ Generally, focus has been on high-end where oversupply could start creeping in ∞ Developments catering to the mid to low end have been “few and far between” Friday, February 06, 2009
  18. 18. Which Markets? Location, Location, Location ∞ Even in the best markets, it‟s back to basics:  Location  Financial wherewithal of the sponsors  Appropriateness of the product  Quality of the stakeholders (contractors, tenants / operators,…) Friday, February 06, 2009
  19. 19. Is there any money out there? What a difference 12 months make… ∞ All in cost to party seeking financing has shot up ∞ Tenors have come in ∞ Valid for both Islamic and conventional financing ∞ Club deals Friday, February 06, 2009
  20. 20. Is there any money out there? What a difference 12 months make… HSBC/ DIFX Sukuk US Dollar Bond Index (SKBI) SKBI: Spread SKBI: Duration (Last data point: September 5, 2008) (Last data point: September 5, 2008) Friday, February 06, 2009
  21. 21. Is there any money out there? What a difference 12 months make… HSBC/DIFX Middle Eastern Conventional US Dollar Bond Index (MEBI) MEBI: Total Return MEBI: Duration (Last data point: September 5, 2008) (Last data point: September 5, 2008) Friday, February 06, 2009
  22. 22. Is there any money out there? Credit has become a scarce and expensive commodity Friday, February 06, 2009
  23. 23. What‟s a person to do? ∞ Focus, do not overextend ∞ Development financing will be difficult, in particular for spec projects: Pre- lease, pre-sell, sign up anchor tenants ∞ Operating properties financing will be more challenging than in the past and conditioned on cash flow coverages with much less importance given to loan-to-value criteria ∞ Expect higher LTVs Equity will be a bigger piece of the puzzle ∞ Quality of third party appraisals will need to improve substantially ∞ If banks are interested in your project, don‟t waste time: in this market a tougher financing agreement is better than no financing at all ∞ There is no cheap money out there any more Friday, February 06, 2009
  24. 24. What‟s a person to do? … as a result, a number of projects will not meet investors return criteria and/or may not attract financing ∞ The good news is…if you have time… easy credit will eventually be back Friday, February 06, 2009
  25. 25. Friday, February 06, 2009

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