From dizzying heights to CMBS frights

In his latest column reflecting on his decades in real estate, John Slade looks back at the unfolding of the global financial crisis – and the lessons dealmakers can use today. COMMENT As we cruised into 2006/2007, property investment levels were awesome. Myself and my industry friends were riding the wave. Surely nothing could go wrong? In the summer of 2006, I was co-chair of capital markets at DTZ, then the number one agent in the UK. We were just completing a “top-of-the-market” deal: a portfolio of German retail warehouses and department stores being shifted from a fund manager to a UK debt-driven buyer – worth more than €700m (then about £480m). At the same time, I was in South Africa discussing the instruction for a possible sale of the Fourways shopping centre, just outside Johannesburg, by its Greek/South African owner. These deals were representative of the time: chunky, in abundance and oh so international. We weren’t worried about what was next, we knew the next deal was around the corner. But something unpleasant was bubbling in the US – CMBS. Disappearing deals If London real estate investment advisers were being honest, they would admit that prior to this, they had never heard of them. Commercial mortgage-backed securities were financial instruments devised by commission-based US bankers to up their deal making. The front face of debt with the real estate not providing the necessary security, with borrowers who could not afford to service the debt and did not have the means to pay it back. A story well told in the great book and movie The Big Short. It was not just CMBS, but all sorts of debt instruments that rocked the whole global financial system – the lenders had bet the ranch and lost it. Welcome to the great financial crisis. In 2007, Northern Rock went bust and in autumn 2008 it was Lehman Brothers. Incidentally, earlier that year at MIPIM, an excellent journalist told me she had heard of a major US investment bank collapsing but no one would believe her. She didn’t write her story – to most it seemed too absurd to imagine. In the following years there was no debt. It was not being paid back and certainly not being lent. In London, yields moved out seemingly overnight for prime offices from 4% to 5% to 7%-plus. The deals didn’t just slow down – they disappeared altogether. The phones simply stopped ringing at the major agencies. The international real estate boom had turned to doom. The market stumbled through 2007 and 2008. There was no activity, companies were becoming bankrupt every day, repossessions were on the up and then came the agency redundancies. Roll up the sleeves I decided to leave DTZ in 2009. At the time, London yields were high, but the banks were stabilising and the economy recovering, albeit with a little bit of government help. The Bank of England base rate was on its way down from 5.75% in July 2007, finding its way to just 0.5% by March 2009. There had been a smattering of deals with yields around 7% as base rates came down. In our private equity firm, my partner Steve Webster and I raised money to buy in London. The theory was brilliant but good old London, as usual, recovered too quickly: 7% became 4.5% between the summer and winter of 2009. The market had recovered so quickly that we could not buy at the returns we needed to provide the performance we promised. If you are a current doom-monger of pricing in London, please note the speed of recovery – maybe not as fast, but it will happen. Our company got there; private equity was what it said on the tin, but much of it was ours. We played at the “roll-up-the-sleeves” end of added value – successfully too. By 2012, the London and UK investment markets were more than alive again. For me, 2012 saw the start of a period as chief executive of BNP Paribas Real Estate UK. There followed some great business turning the company into profit and rejuvenating the brand in the UK, finishing five years later with a takeover of Strutt & Parker. In the agency world there was more amalgamation. Cushman took over the rump of DTZ in 2015. CBRE and JLL continued adding businesses. Internationalisation continued with new players – the Taiwanese and Indonesian – buying large London offices. We saw the rise in the UK of the mega fund managers: Blackstone, Brookfield et al. Things were more digital and more sophisticated. Lessons seemed to have been learnt, there was less debt/gearing and so many more compliance teams. Surely it was all rosy again by 2016? To be continued… John Slade is director at Sladesco