Sept 2007 - Issue 69 Previous Issues

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Property correction depends on lenders

Rising risk aversion a global condition
by NINA SUEBSUKCHAROEN Full link to article

Neil Robbirt Global's Chief interviewed by the Bangkok Post

Neil Robbirt Global's Chief interviewed by the Bangkok Post

A global property correction is possible because not just the sub-prime market but property funds worldwide have been affected by the credit squeeze in the US, according to Neil Robbirt, chief executive of Global Investments (Far East) Limited.

People's reluctance to spend money already is already starting to affect sales in the Thai market, he notes. There are a lot of projects coming online over the next two years that have not even started pre-selling because of the poor sentiment.

"The banks have already started to tighten the money being lent out," he said. "Lloyds Bank, one of the banks we deal with, is already saying no to certain property loans in London, so you are already starting to see a credit squeeze."

Mr Robbirt noted that prices have begun to slide in Bangkok especially for three- to five-bedroom condominiums. "Some of them are starting to look quite good value to what they were six months ago because they are not selling."

However, he says the correction is mainly at the luxury end of the market. One- to two-bedroom condominiums near mass transit are unlikely to be affected as there is a market for them.

"It's the luxury end or something that is inaccessible, even something down in Onnuj isn't necessarily a bad proposition because it's near the skytrain but if you are 20 minutes down Soi 101 that is not a good proposition."

The sub-prime collapse has been a catalyst across the globe and this could lead to prices of overvalued property in London, not necessarily retail but private property, to crash. "So I believe overvalued properties in cities such as London are heading for a 15% correction."

It is noteworthy that property prices in London have been waiting for a correction for 18 months, and while the sub-prime issue is now clearly the trigger, it was going to happen anyway and just needed an event in the market.

"In my opinion I think the markets have been on a bull run so long that the sub-prime issue or any issue would have caused a correction, because the markets can't keep going up forever."

It was the US investment bank Bear Stearns that really triggered the crisis when word emerged that one of its sub-prime funds was essentially worthless, Mr Robbirt explained.

"How can you value something that's worth billions of dollars because what you're actually doing is valuing debt? So you're assuming everyone is going to pay their money, if they don't it has zero value, which is actually what one of the independent auditors said _ the fund has zero value because it's all debt. If someone doesn't pay their money back it's a debt, they were using debt as an asset."

Although there is collateral behind the debt, the holders of these debts might not have the first claim on the property.

While the situation is rare in Thailand, property owners in the US, Europe and Australia can take second or even third mortgages on their properties. "Okay, you got your first mortgage and then you decide you want to put a two-bedroom extension on your property for $100,000, so you go to another lender, then you decide you want to put a swimming pool in, so you go to another lender."

Lenders' ability to seize property depends on whether they have the first, second, third or even fourth claim on the asset. "If they are number three or four on the property how can they?"

Fortunately for Thai consumers, banks here have been quite cautious about lending ever since the 1997 meltdown. "The Thai bank will [approve] a 50% loan, so it is covered, whereas in the States, or Europe or Australia if someone is getting a 90% loan that's fine as long as property prices keep going up. What about if they come down, what if interest rates go up and they can't pay?"

Mr Robbirt noted differences in perception of property even among various western cultures. In the UK, US and Australia, bricks and mortar are seen as the best assets and something to which everyone should aspire. But some other European people have a different viewpoint. "If you take countries such as Holland or even Germany, very few people buy, they don't have the same property background as in the UK, in US or Australia _ buy, buy, buy and that's fine in a buyers' market."

In Asian countries including Thailand, the preference is clearly to buy rather than rent, with consumers helped by attractive offers and long-term loans.

Even so, there is much to be said for renting instead of buying a property because if one can rent a condominium worth 7-8 million baht for 25,000 to 30,000 baht a month, one might better doing that because as an owner one might get a very poor rate of return. "You would be better off putting it in a fixed-rate [investment], or a bond. Anything beneath an 8% return doesn't make any sense in the property market because you can have your money liquid on a fixed rate so why would you want it as an investment in property?"

In the current nervous environment, Global Investments has moved its clients to capital-protected, fixed-rate schemes. These instruments invest in bonds and also deposits. An example is a bond out of Switzerland with the investor's capital 100% guaranteed by Credit Suisse. With a minimum investment of 50,000 dollars or euros, the anticipated return in US dollars 13% and in euros it is around 9%.

The company also helps its clients put their money in short-term deposits with the three-month annualised deposit rate as of Aug 27, 2007 for US dollars being 5.66% and on Thai baht 7.18%.

"If they want to tie their money up for 12 months they could get up to 8.32% on sterling, 7.87% on the dollar and 6.75% on the euro," says Mr Robbirt.

"If we have a new investor walking into our office, there are three options: protected bonds, you have a fixed-term deposit and you have the opportunity to go into the [stock] market.

"Now, if someone wants to make a medium-term gain, take advantage of the current situation, there is reasoning behind it which says you should go into the market because it has corrected already, but if you're worried that there is worse to come and you just don't want the concern of being in the equity market, you either go into short-term deposits or guaranteed bonds."

In Mr Robbirt's personal view, the worldwide trend, Thailand included, is for the stock market to be very volatile over the next four weeks but it is possible that there will be a final-quarter rally in October and November when there could be a return to the bull market.

Please contact Global Investments for more information
Tel. (+66-2) 662-2009 or e-mail at info@globalinvestments.net.