Property market hunts for lenders

A year ago, who would have thought that many established property markets would have effectively broken down because commercial investors and individual buyers cannot find lenders? Who also would have thought that the effects would so quickly show themselves in the commercial investment and house building statistics?

For example, the construction industries in three of the world's most vulnerable property markets – Spain, the United Kingdom and the United States – have almost downed tools due to volatile returns and difficulties for home buyers to get mortgages.

In Spain, the CEOE, an employers' organisation, says the property slowdown will lead to some 700,000 job losses in 2008 as private developers and contractors respond to funding problems and, specifically in the housing market, significant over-supply too.

Spanish outlets of the global furniture giant Ikea and more local furniture manufacturers, plus property fit-out firms and electrical equipment suppliers, have reported significant falls in business since January.

It is the same story in the UK, where the National House Building Council, an umbrella body which represents firms constructing 85 per cent of homes in the country, show that completion rates in the first three months of 2008 are 25 per cent down on the previous quarter and around 15 per cent down on the same period of 2007.

The steepest decline is from major PLC firms, which have their largest direct staffing and can exercise the most rapid about-turn. Orders to private building sub-contractors in February, the latest data available, are half of those placed in January.

Meanwhile the UK's third largest builder, Barratt Homes, has an extraordinary £1.7 billion debt burden and appears to be on the point of wanting to raise fresh capital via a rights issue, according to leading shareholders – the indirect result of buying another, smaller builder for £2.2bn just over a year ago, at the top of the market.

Across the Atlantic, the US house-building industry's downturn is also in top gear, although unlike in Europe it has had accelerating problems for well over a year now. The number of housing starts is down 54 per cent from the US 2005 average, offset by a 25 per cent rise in commercial construction during the same period. In all three countries there have been declining house prices – although still only tiny dips in the UK compared to Spain and the US – and each has volatility in all aspects of its commercial property market, from direct investment to REITs.

There may even be signs that other emerging markets are second-guessing slowdowns in their regions and taking action accordingly. For example the kerfuffle over Damac Holdings' 25-storey Palm Springs building – is it cancelled, Is it not? Was investor compensation adequate, Was it not? – has been interpreted by some as a pre-emptive strike by the Dubai construction industry anticipating its slowdown, too.

Its portfolio includes properties spread across 450 million square feet and is worth more than $30bn.

But if a slowdown can happen in a very short time, so can a recovery. And it can come from an unexpected direction. For example, although the US may well have taken many national property markets into decline, the wider world may drag those markets out of the doldrums. The International Monetary Fund expects global growth to fall from 4.9 per cent in 2007 to 3.7 per cent by the end of this year – that is a much smaller drop than many commentators expected given the turmoil in America, because these days the impact of the US on the world economy is diluted by the emergence of the Middle East, Balkan states and some parts of Africa.

Likewise the property industry, now in the doldrums, may escape a global meltdown thanks to its growing tentacles to emerging locations.

Forbes magazine, outlining its favoured global real estate investment areas, has just chosen Jordan, Malaysia, Russia, Brazil, Chile, India and China over the established hotspots.

It has based its findings on two influential surveys – the World Economic Forum's 2007 Global Competitiveness Report and the World Bank Group's 2007 Doing Business study, provided by the Institute for Liberty and Democracy in Peru – plus growth and inflation figures from the International Monetary Fund.

What's more, Forbes has factored in the transparency of deals and issues such as clear title to establish land and building ownership. So these emerging markets, once considered too risky to be recommended as solid investments because of their dubious sales and funding practices, have in the blink of an eye become top notch. No one is suggesting that emerging markets offer the solution to the banking crisis that has caused so many problems for the property world. But, yet again, we are seeing a balance of property power shifting while the crisis continues.

And that long-term shift is happening just as fast as any short-term slowdown.

Graham Norwood is property correspondent for The Observer
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