In this week's blog, we have a look at what could be a rapidly unfolding situation in the commercial real estate market, the impact that may have on global markets, and how we feel that our asset class that primarily correlates with the success of our domestic residential housing market, could be a lifeboat for investors as waters get a bit choppier in global real estate.
To begin the tale, we must go back to the troubling days of lockdown, as our towns and cities fell silent; the centre of London became reminiscent of the 2002 Danny Boyle hit horror movie 28 days later, as workers settled down infront of their laptops at home for the long haul. The temporary slipped into permanent, resulting in a cultural discombobulation of the populace; trying to make the unnatural normal wasn't easy; our collective national endeavour was the stoic belief that everyday life would resume one day. Nobody foresaw the most remarkable work-life change in the last hundred years being born here, for a significant percentile of the population, the 9 - 5 that had flourished in this country since the post-war years, was over.
The commoditization of commercial real estate market is vast, with 34 trillion dollars of assets globally, it underpins global economies, and while a vast amount of that also includes industrial and agricultural usage, there is still almost 6 million sqft of office space in the UK alone, it's a significant proportion of our towns and cities economies. This new work-life normality means commercial occupancy rates are falling, commercial office buildings are becoming less attractive assets for refinancing, and the values begin to fall. Analysts at Citi have warned their clients that commercial real estate across Europe has yet to factor in the full force of rising rates meeting the demand for refinancing and that values could fall 40% by the end of 2024. Of course, now, there is always someone else painting the opposite picture with the same set of data; buyers and sellers, by their very conflict of interest, often have opposing views, but to us, what this indicates is we don't know how to value assets with an ever declining footfall yet, and that in itself is troublesome, vacant possession implies that the vacant element of the deal is transient, not permanent.
The above challenges were reasonably evident as far back as 2021, but a newer issue has come to light in recent months; the Wall st Journal revealed that it's predominantly small and regional banks across America and Europe that hold the 2.3 Trillion of commercial real estate debt, a statistic also backed up by Goldman Sachs analysts who state that 80%+ of all real estate debt on commercial property comes from regional banks most vulnerable to the latest liquidity woes. There is some comfort to be had in the fact that structurally most of these businesses are sound, and acquisition by larger entities such as JP Morgan's acquisition of First Republic is always an option in a well-capitalized market; however, how willing are these incoming banks going to be to recapitalize all this debt? Morgan Stanley's analysis team says, "It's worse than the great financial crisis." which perhaps summarizes their lack of willingness; the rise of vacancies meeting the fall in property values will create a situation where refinancing becomes the headline issue.
So now that we have scared all the readers with talk of horror movies and zombie markets, how can we loosely tie all this back into p2p lending so it has some coherent point? The success of our asset class is correlated with the success of our domestic residential housing market and our domestic construction industry; it would be foolish to state there are no correlations with the broader markets; however, both sectors are relatively ringfenced from the woes described above. One investment class we are often compared to is REITs, and what we may also see is an influx of investors who have been waiting for attractive entry points, realising that entities filled with commercial real estate may have a lot further in value to fall yet, and P2P in the short term will provide them with some steady returns.
So, to perhaps conclude with this, we don't subscribe to the "nothing to see here" form of commentary you will see rife within the industry; there are going to be some tricky times ahead, but we feel our asset class provides a stability that will become increasingly more attractive as events unfold, which is incredibly positive.
Invest & Fund has returned over £144 million of capital and interest to lenders with zero losses, showing the rigour that governs our business.
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