According to Standard & Poor, the value of the global stock markets fell by US$3 trillion in June. The first half of 2008 has been rather bleak for global markets; the credit crunch, falling stock markets, inflation and political woes have shaken investors.

 

However, savvy investments during times of equity turmoil can provide many opportunities for growth, especially in more secure assets like bricks and mortar. It is important to consider the varying degree of risk across all markets before choosing an investment location. Markets that are reaching the bottom of their cycle and contrastingly newly developing economies with good fundamentals can provide promising opportunities for investors.

One such example is the US market. Officially a bear market, property prices have fallen more over the last 12 months than in any year since the Great Depression and the American stock market is now down 20% from its peak. The credit crunch has tightened the wallets of populations, primarily in the US and UK. Economists at Bank of America think consumer spending will decline in the current quarter (Q3 2008), for the first time in 17 years; The Economist writes: “the fourth quarter could be worse”.

Sub-prime mortgage lending allowed whole neighbourhoods to be funded on cheap credit and inflated expectations. The direct result of sub-prime has seen distressed sales, rash foreclosures and reduced housing purchases. According to a report by the Mortgage Bankers Association in Washington, foreclosures increased to the fastest pace in almost three decades during Q2 2008.

The middle and lower class are suffering, faced with owing their banks more money than their property is actually worth, and some American suburbs are even witnessing cases of residents simply walking away from their properties. This phenomenon is being replicated in many states, particularly Florida, Nevada and Los Angeles. A number of US states now face the issue of plummeting house price values and over supply. Harder-to-get financing has also kept would-be buyers from taking advantage of reduced prices, further propelling the market downwards.

A number of US states now face the issue of plummeting house price values and over supply. Harder-to-get financing has also kept would-be buyers from taking advantage of reduced prices, further propelling the market downwards

With more people forced off the property ladder, we are witnessing a strengthening rental market. IP Global believes that some states, where supply is limited such as Los Angeles and Las Vegas, have already reached the bottom of their cycle and are now at the beginnings of an upward trend, pushed up by investors and cash-rich Americans. The US market is not far from becoming a buyer’s market. According to Tim Murphy of IP Global, the Las Vegas market is already beginning to turn and stock can now be purchased at 30-50% below last year’s pricing. With investment growth, strengthening yields and the beginnings of an appreciating US dollar in play, distressed market property investment can provide attractive returns.
Looking across the Atlantic to the UK we are seeing a similar scenario, albeit not yet so severe. Approximately £400 billion has already been wiped from residential property values in the past year, according to PricewaterhouseCoopers. With GDP growth revised to 0% the British economy is at a standstill. Alistair Darling, Chancellor of the Exchequer, commented that the British economy was “arguably the worst they’ve been in 60 years” – it is no wonder consumers are feeling poorer and confidence is plummeting.

The Royal Institute of Chartered Surveyors (RICS) stated, on average, a UK estate agency made 12.7 sales in the three months to August, the lowest activity since it began tracking transactions in 1978. New mortgage approvals in July were 71% lower than in the same month of 2007. Tightened lending has also meant larger deposits for mortgage down payments, making home ownership out of reach for many Britons. Today, 66% of an average couple’s earnings need to be set aside to cover the basic costs of buying a house, conversely in 1997, it was just 20%.

The British Government has announced a number of measures to support casualties of the property crash and cushion the UK property market fall. Such measures include increasing the stamp duty threshold from £125,000 to £175,000, a shared equity scheme with developers offering up to 30% interest free loans, and councils having the ability to purchase back all or part of home owners’ properties and leasing them back to them. However, inflation also greatly affects UK household spending. The escalating cost of fuel is vastly increasing household utility bills, further pinching consumers wallets. Consumer spending will continue to fall affecting the number of first time buyers and those wishing to upward sell.

Correction of the UK market is certain and necessary, household debtto-income ratio is higher than America making it more vulnerable to the credit crunch. The UK market still has further to fall until it bottoms, when it does it will certainly become more of a buyers market. House prices have fallen 11% in the past year and according to an economist at Morgan Stanley they may fall a further 10%. Experts will continue to monitor the UK market as it continues its downward trend.

The sub-prime and credit crunch crisis has resulted in numerous opportunities for distressed market investments. The key is to ensure all investment fundamentals are aligned before taking the plunge and parting with your hard earned cash.

Another market experiencing price correction is Vietnam where tightening bank credit has resulted in a punctured real estate bubble. Regularly compared to China 10 years ago, it is thought the current slump in the market so far this year mirrors China mid-1990s, a result of rapid growth followed by a reactionary cooling, followed by stabilisation. Residential prices are now more than 20% below end-2007 levels, and buying sentiment is expected to be negatively affected by the 25% capital gains tax on property transactions due to come into affect in January 2009.

However, property demand remains high in Vietnam. Ho Chi Minh City’s current shortage of property is estimated at six million square meters required within the next three years. Significant undersupply has pushed the high-end luxury rental market ever upwards, lead by the demands of expatriates.

Consumers still believe in the longterm value of the Vietnamese market. From January to July 2008, FDI approved by the government totalled US$21bn, just over the total approved in all of 2007. GDP growth may have been projected downward to 7% from 8.5% in 2007, but consumer sentiment remains very positive and shows no signs of abating. Auto sales are up 162% and PC sales up 21%. Ford’s operations in Vietnam are unable to keep up with supply and 2008 has been its best year to date. Inward investment
is still flowing by major multinational companies and sentiment remains positive. “Regardless of the economic situation, Vietnam is still very attractive,” says Chi Yong Cho, Samsung’s handset strategy chief.

Vietnam’s tourism market is growing steadily and, by 2010, the Vietnam National Administration of Tourism (VNAT) is aiming to attract up to six million international arrivals, 25 to 26 million domestic visitors, and achieve tourism revenues of US$4bn to $4.5bn, projected to be the sixth fastest growth in tourism globally.

Vietnam’s young population, booming tourism industry, undersupply and opening up of the judicial system to foreign property
investment are all positive factors for the country’s future growth. Consumer sentiment remains strong, and whilst Vietnam has experienced a slight downturn in the market we believe this is only for the short term.

Not all markets are in a state of correction. According to the EIU the aggregate output for the Asia-Pacific region excluding Japan is expected to expand at a strong pace of 6.9% in 2008. This revised growth rate is only slightly lower than the 7.1% pace projected in January and almost three times the growth of the global economy.

The investment fundamentals of some emerging economies remain strong particularly those of Brazil, Abu Dhabi, Malaysia and Cambodia to name a few. Less reliant on credit, these markets will continue to grow albeit at a slower pace than witnessed in 2007. A clear trend of mass urbanisation, continued economic growth, low interest rates and limited supply, and the market’s stage of legislative development all affect investments returns. One such market demonstrating good growth is Brazil.

Brazil’s economy, one of the world’s largest emerging markets, is growing at its fastest pace since 2004. In May this year Standard & Poor (S&P) revised Brazil’s credit rating to BB+, making way to increased investment in the Brazilian credit market and allowing the government to raise finances in increasingly competitive terms. Despite the market’s slow progress in gaining a developed banking system, there is a strong local demand for property, a key driver for overseas investment. Contrary to the US and European markets, in the last 12 months banking credit has increased by 103%, whilst inflation remains low.

Samuel Zell, chief executive of Chicago Tribune and chairman and president of Equity Group Investments LLC, believes Brazil ticks all the right boxes for an informed investment decision, and has the chance to be a “bigger economic power than China” 30 years from now. Brazil is a key economy with strong investment fundamentals, and primary cities offering strong secondary market liquidity such as Sao Paolo are ripe for investment.

Like Brazil, Asia’s young or nonexistent banking systems have allowed some resistance to the credit crunch currently buckling many lower and middle income classes in the developed West.

One trend affecting most if not all Asian emerging markets is inflation – from low income households forced to cope with rising food costs to developers facing mounting building material costs. Malaysia’s inflation soared to 8.5% in July 2008, a natural knock on effect being increased property prices. In the short term developers are absorbing these costs, however, this cannot continue. According to Morgan Stanley Research, construction costs rose approximately 17-19% in FY08, translating to a 7-9% impact on selling prices.

Malaysia’s high amount of liquidity, where some RM10bn is circulating in house buyers’ hands due to the newly amended Employee’s Provident Fund’s rules allowing members to withdraw funds for the purpose of home buying, is sure to further propel the market.

There are many options within today’s market for smart investment plays. The US is a perfect example of savvy investors recognizing that, with every cyclical downturn, opportunities present themselves. If the underlying economic and demographic drivers exist, along with a large reduction in prices, this naturally poses a tremendous opportunity for investors. Likewise, developing markets that continue their upward swing with strong continued growth allow for generous returns. At IP Global emphasis is on due diligence surrounding each and every project. Particularly during times of instability, fundamental research into the macro market as well as micro-economic elements is essential.

 

IP Global Limited (www.ipglobal-ltd.com) is a property investment company, which specialises in sourcing residential property developments in emerging and established markets as private investment opportunities. For more information please contact your FP adviser.