© Colin Lizieri 200920 September 2009

Finance, Regeneration and the Credit Crunch

Colin Lizieri

Grosvenor Professor of Real Estate Finance

University of Cambridge

2

Agenda

• Townshend and Daltrey (1966)• Context: Gearing, Capital Values, the Credit Crunch• Obtaining Capital for Development• Public Sector Roles and Techniques• Public-Private Finance: Issues and Questions• Observations on Risk, Return and the Market

Gearing and Commercial Real Estate

3

UK Bank Lending on Commercial Real Estate

0

50000

100000

150000

200000

250000

300000

Dec-86

Dec-88

Dec-90

Dec-92

Dec-94

Dec-96

Dec-98

Dec-00

Dec-02

Dec-04

Dec-06

Dec-08

£m

illi

on

Q2 2009: £244billion outstanding … source, Bank of England

Context: European CMBS Issuance

4

Source: Lizieri (2009), Barclays Capital, Moody’s

0.0

15.0

30.0

45.0

60.0

75.0

90.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

€ b

illio

n

0

10

20

30

40

50

60

70

80

90

No. tr

ansactio

ns

Issuance

Transactions

Context: Falling Yields and Rising Values

5

Values rose by 52% January 2001 to June 2007. Source: IPD

Context: Value Gains Wiped Out Post-2007

6

Values fell by 44% June 2007 to July 2009. Source: IPDRecall that a fall of 44% is reversed by a rise of 79%

Capital for Private Development Post-2008

• Closing Down of Public Debt Markets– No direct capital market access or rate competition– “Originate and Distribute” models, loan book liquidity

• Shifts in Private Debt Markets– Credit and liquidity crises– Non-performing loan impacts and risk ratings– Regulation, Basel II (and III?) and capital adequacy– Margins, loan terms, security and flexibility

• Private Equity– A global crisis, not localised– Recovery funds, vulture funds and sovereign wealth funds

• Public Capital– Stabilisation measures, QE and public finances– “Discretionary” spending and “low priority” programmes

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Public Sector: Financial Roles and Techniques

• Roles– Direct investment in infrastructure and regeneration– Partnership, risk sharing and support – Planning, coordination and regulation

• Existing Mechanisms– HCA, RDA, LA activity– PPP, Local Asset Backed Vehicles

• New and Proposed Mechanisms– Business Rates Supplement, Community Infrastructure Levy– JESSICA and Regional Infrastructure Funds– Tax Increment Financing / ADZs

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Public Sector Financial Inputs: Issues

• New Mechanisms and Market Timing– “Glacial progress” versus “Not Now”

• The “TIF” Approach– Displacement and substitution effects– “Incremental revenue” – new build or value uplift?– Capital costs and revenue implications

• Competition and Incentives– Planning flexibility, development stance and tax incentives– Democratic choice and Tiebout effects– NIMBYism and coordination issues

• Risk and Return– Linking local finance to property and capital market cycles?– A fair share of risk – developers’ profits in partnerships

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Some Observations …

• We Need More Financial Innovation Not Less … – Post credit crunch perceptions and regulation– Vanilla-plain finance and “the flight to quality”– Debt securitisation is a good idea, not a bad one

• Long-Term Perspectives– Short-term return chasing, efficiency and decisions– Risk-return tradeoffs versus new paradigms– Economic fundamentals matter

• Shifting Market Perceptions– Gearing, Return and Risk – Asset Risk and Finance Risk– How Risky is Regeneration Really? – Are prime “institutional” investments really safer?

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Global Office Investment?

• Heavy Concentration of Global Real Estate Investment– 49% of 2007, 2008 deals were City offices– 64% of deals, 79% of office deals in Global Financial Centres

• But Global Financial Centres are More Risky– Occupier, Investment, Development and Funding markets linked– Markets are linked across cities and regions– Vulnerable to linked shocks, systemic risks

• Impact on Risk of Investment Portfolios– Portfolios not well diversified– Ignoring fundamental risk drivers

• Implication – a Key Role for Local and Regional Markets– Must make the case– Must make the case in the right language …

11See: Colin Lizieri (2009) Towers of Capital, Chichester, Wiley-Blackwell

Investment Concentration and Risk

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-80.0% -70.0% -60.0% -50.0% -40.0% -30.0% -20.0% -10.0% 0.0%

City of London

Frankfurt

Paris

Zurich

Dublin

Edinburgh

Amsterdam

Stockholm

Oslo

Dubai

Madrid

Office Values Fall From Peak

Selected Cities Q2 2009

Rent %

Cap Val %

Source: CBRE/Lizieri

Real Estate Performance 1980-2008

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0.0

500.0

1000.0

1500.0

2000.0

2500.0

19

80

= 1

00

City offices

Eastern Retail

Eastern Industrial

• Superior Risk Adjusted Returns and Diversification Benefitso City offices 7.5% p.a. return, 13.6% standard deviationo East industrial 10.1% p.a. return, 12.2% standard deviationo East retail 10.2% p.a. return, 10.1% standard deviation

© Colin Lizieri 200920 September 2009

Finance, Regeneration and the Credit Crunch

Colin Lizieri

Grosvenor Professor of Real Estate Finance

University of Cambridge