‘US sub-prime crisis, downturn to hit global realty sector’

September 20th, 2008 - 7:06 pm ICT by IANS  

Panaji, Sep 20 (IANS) Global financial turmoil, triggered by the US sub-prime crisis, will have a far-reaching impact on the worldwide realty sector in 2009 due to investments drying up and cost of funds becoming dearer, a top realty consultant said here Saturday.”Credit crunch, triggered by the sub-prime crisis in the US housing market a year ago, has shutdown securitised debt for commercial real estate. Meltdown in equity markets has dried up investment flow into other segments of the realty sector,” Jones Lang LaSalle chief executive (Asia-Pacific) Peter Barge said at an international realty summit here.

Terming the current situation the worst downturn ever seen in decades, Barge told about 100 delegates at the three-day Girem realty event that the world would see the flip side of globalisation and its ripple effect on stakeholders across the spectrum.

“With the possible exception of oil price dropping and remaining below $100 per barrel, I see little good news out there, as no one can remain immune to what’s happening in the financial and real estate sectors because of globalisation linking us all together,” said Barge.

Globalisation has made the realty pie grow bigger and is estimated to be a whopping $22 trillion (Rs.1,012 trillion) worldwide.

Growing at about four percent per annum, the total value of the global realty market is more than the European GDP of $15 trillion (Rs.690 trillion) due to wealth expansion and increasing urbanisation.

“About 300 million people are expected to migrate to cities in China over the next decade. The demographics destiny of India is no different. Similarly, in the Middle East (Gulf region), real estate is developing on a global scale, with investments upwards of $1.5 trillion,” Barge noted.

Of all the secular trends in commercial real estate, globalisation is becoming the norm changing the investment industry worldwide. The inter-linkage of capital and leasing markets, convergence of building standards and functionality, regulatory standards and transparency have all globalised the realty sector.

Be that as it may, the US sub-prime crisis has spilled from residential mortgages to general asset-backed securities market and spread worldwide.

As a result, real estate yields have eased out, delivering 15-25 percent asset price corrections and transaction velocity reductions of 50 percent from 2007 peaks.

“Till mid-nineties, sub-prime was used to describe an especially desirable type of loan that charged less than the prime rate of interest and was offered to most reliable commercial borrowers. That meaning has been replaced. It’s not the interest rate, which is less than prime today but the rating of the borrower,” said Barge.

Elaborating on the fallout of the financial turbulence and economic downturn, Barge said the global realty sector would turn around in mid-2010 after a lot of churning, consolidation and correction in 2009.

“The US housing market remains in serious trouble. One in seven US home-owners have more in mortgage debt than the current market value of their homes. Banks re-possessed almost three times as many US homes in July as a year before and the number of properties at risk of foreclosure jumped to a whopping 55 percent,” Barge pointed out.

In the wake of investment banks such as Lehman Brothers going bust, Merrill Lynch getting sold off (to Bank of America) and American International Group (AIG) getting bailed out (by the US Federal Reserve), many analysts expect about half of the 8000-odd US banks to fail down the line.

“According to one estimate, US banks are likely to lay off about 200,000 employees during 2009 and hand out $18 billion less in pay and bonus this year than 2007, the largest one year drop ever,” said Barge.

Due to sub-prime crisis, loans, which were 90 days or more overdue and deemed troubled by the state-run Federal Deposit Insurance Corporation (FDIC), shot up 20 percent to $162 billion, with real estate loans accounting for 90 percent of the rise.

“The world has changed and we need to recognise what’s different and act accordingly,” Barge advised the Indian realty players.

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