Residential Real Estate – Value After the Subprime Crisis Britt Gwinner, CFA Principal Financial...
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Transcript of Residential Real Estate – Value After the Subprime Crisis Britt Gwinner, CFA Principal Financial...
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Residential Real Estate – Value After the Subprime Crisis
Britt Gwinner, CFA
Principal Financial Specialist
International Finance Corporation
Viña del Mar, 7 May, 2010
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Contents
1. The Basic Picture – housing demand around the world
2. How was mortgage finance linked to the recent crisis?
3. Going forward
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The International Finance Corporation• Goal: Improve lives and raise living standards through
sustainable private sector development
• Member of the World Bank Group, owned by 179 shareholder countries, assets USD 51.4 billion, capital USD 16.1 billion
Global—for more than 50 years has focused on developing countries
Local—full time presence in more than 80 countries and activities in many others
• Housing Finance Investment Services: Loans for mortgage lending; Collateralized mortgage lines of credit;
Warehouse lines of credit; Credit enhancement for MBS; Structured finance; Equity investments; Construction finance
• Housing Finance Advisory Services: Policy and regulatory infrastructure, mortgage toolkit and training,
capacity building
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Growth and urbanization
• World Bank Data Visualizer
• http://devdata.worldbank.org/DataVisualizer/
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Real estate: a tale of many markets• Real estate: more than 1/3 of the value of all the
underlying physical capital in the world
• Developed countries: mature residential real estate markets
Populations are stable or shrinking – demand for financing from turnover, renovation, aging population, regional growth dynamics
>90% of housing units in developed countries are of adequate quality
• Emerging markets: large pent-up demand for housing As countries develop, they urbanize Emerging markets urbanization has been poorly planned - housing
and infrastructure inadequate, housing demand is strong Self-built houses on squatted land lack connections to sewage or
water, built of inadequate materials 44.7% of households in Africa, 25.6% in South Asia lack access to
improved sanitation 20 to 30 million housing units in Latin America lack a basic amenity
such as running water, or are built of substandard materials Inadequate housing compounds the cycle of poverty – health, social
investment, wealth-building6
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Mortgages mostly unavailable in emerging markets
But as real incomes rise, so does capacity to make a mortgage payment
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0%
20%
40%
60%
80%
100%
Den
mark
Un
ited
Sta
tes
Sp
ain
Germ
an
y
Jap
an
Mala
ysia
Ko
rea
Pan
am
a
Italy
Th
ailand
Mo
rocco
Ch
ile
Ch
ina
Lith
uan
ia
Mexic
o
Po
lan
d
Co
lom
bia
Turk
ey
Kaza
kh
sta
n
Ukra
ine
Ind
onesi
a
Guate
mala
Sen
eg
al
Peru
Arg
en
tina
Russia
country
Mortgage Debt as Percent of GDP Selected Countries
Developed countries 40-100% Emerging
markets< 20%
Chile 18% in 2009
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Housing Finance and Growth
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In emerging markets, housing finance is related to new construction and as a result fixed investment, and generally with domestic inputs, both labor and materialsIn developed markets, housing finance is more linked to trading of existing housing and economic cycles
In the U.S., there are 7 million new loans each year, 6 million of which are for existing housingIn developed markets, real estate and related services count for between 2% and 4% of PIBIn the U.S., 8 of 10 recessions since 1949 were proceded by reductions in residential investment
99
Mortgages and Fixed Investment
In the initial phase of development, mortgage finance can add 0.5% of fixed investment as a percent of GDP for each increment in the size of the market
Source: Duebel (2008)
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• Traditional roles: inflation protection, diversification Securities backed by inflation-indexed mortgages are natural
inflation hedges (Chile, Mexico, Colombia) Real estate investments can decrease the cost of inflation
insurance for long-horizon investors (Amenc , Martellini, & Ziemann, Journal of Portfolio Management, 2009)
IRR of about 11 percent for 60/40 stock/bond portfolio with a varying investment in real estate over time. (Performance of Real Estate Portfolios, Fisher and Goetzmann, Journal of Portfolio Management, 2005)
International real estate can reduce portfolio risk (Chua, Journal of Real Estate Portfolio Management, 1999)
• A recent comment from Prof. Robert Shiller: “After prices fall, the media begins to publish stories of investor
foolishness. Investors, feeling stupid or betrayed, have a “betrayal aversion” that causes them to react intensely and sell in anticipation of future price drops.”
Real estate as an asset class
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• Fixed Income Residential Mortgage Backed Securities (RMBS) – True sale
to special purpose vehicle (SPV) that issues bonds • Long duration, some uncertainty in principal amortization
(prepayments), varying structures, stand-alone credit rating, almost no replacement of assets, no recourse to loan originator
• In Peru, AAA local scale RMBS provides 32bp over 3y AAA corporate (when corporates are available, it’s a thin market), 202bp over 3y sovereign
Covered bonds – general obligation bonds with contractual and/or legal backing from a portfolio of mortgages
• Long duration, prepayments may be mitigated, credit profile a function of issuer’s balance sheet and security portfolio, assets may be replaced, complete recourse to bond issuer
• Yields comparable to AAA corporates
Investment vehicles for residential real estate (1)
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• Equity Rental apartment buildings, property developers,
land banks, private equity Residential rental - works best where laws permit a
reasonable balance of tenant and landlord rights and responsibilities
Rental reforms recently passed in Brazil, considered in Mexico, others have stronger market traditions (Uruguay)
• Hybrid Real Estate Investment Trusts or Funds – United
States, Asia, increasingly in emerging markets – while tax advantages not relevant to most pension fund investors, return may be
Investment vehicles for residential real estate (2)
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U.S. subprime boom and bust – finance driven, excessive leverage, weak credit
underwriting
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
50
70
90
110
130
150
170
190
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Do
llar
s in
Mil
lio
ns
S&
P/C
ase-
Sh
ille
r N
atio
nal
Ho
use
Pri
ce I
nd
ex
Year
U.S. House Prices and Mortgage Originations
House Prices
Total Mortgage Originations(Right Hand Scale)
Subprime
FHA/VA
Sources: S&P Case-Shiller, Inside Mortgage Finance
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A largely external crisis
• There are no subprime mortgages in emerging markets Lending generally to high income borrowers, with low LTVs and full
documentation
• Emerging sovereigns and corporates benefitted from low borrowing spreads during the boom But, macro management has broadly been strong, emerging markets
come out of the crisis with relatively low decline in GDP, many cases of growth
• At the worst of the crisis, funding retreated to New York, London, Madrid, etc.
• Limited development of some capital markets mitigated bad effects –e.g., Egypt, Guatemala
• Relatively strong economic performance protected others – China, India, Brazil, Peru
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What haven’t private pension funds invested more in real estate?
• Constraints Macroeconomic volatility – inflation, inconsistent policies,
financial crises - Mexico ‘95, Russia ‘98, Argentina ’01• High real rates + volatility make government debt more
attractive Lack of long term fixed-income instruments, lack of
secondary market liquidity, yield curves Investment channeled through personal rather than
institutional means• Uruguay rental apartment buildings built & owned by
individuals, family firms Informal markets flourish because of faulty legal and
regulatory structures
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How to boost private pension fund real estate investments?
• Lower real rates make private fixed income issues more attractive Recent history in Chile, Mexico, Brazil, Colombia, Indonesia, India, China,
etc.
• Promote a range of long term fixed-income instruments, and a range of credit ratings – move away from incentives to pure triple-A markets Permit securitization, covered bonds, funds, REITs – issuer chooses best
execution Chile as a model – 1980s reforms created AFPs, letras hipotecarias Wider range of pension, insurance benchmarks
• Promote secondary bond market liquidity Benchmark government yield curves – extend maturity, issue to promote
liquidity Strengthen exchanges transparency, efficiency
• Improve legal and regulatory structures of real estate markets More efficient land use planning, title registration, contract enforcement
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Annex - LAC RMBS during the crisis Reliance on local investors, mostly low mortgage
delinquencies, persistent demand from private pensions and insurers
• Chile – Structured issuances up 6 times in 2009 v. 2008, of this, 9% was RMBS
• Panama – La Hipotecaria 9 RMBS issues through 2008, securitized consumer loans 9/08, rolls commercial paper through 3/09, issues MTNs 4/09 – all to local investors
• Peru – corporate issuances, structured finance for auto, consumer, leasing, and Titulizadora Peruana issues RMBS 02/10, USD 34.5 million, oversubscribed
• Mexico – Severely affected by the crisis, downgrades in RMBS issues by failed lenders, but strong performance by RMBS from major banks, Infonavit, Fovissste
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Annex - LAC RMBS during the crisis (cont.)
Colombia
• USDeq 2.4 billion issued since 2002, trading at average price of 104.6 at end March, 2010
• UVR (inflation-adjusted), increasingly nominal fixed-rate peso
• Prepayment rates have run 10.5% UVR, 14% peso, defaults < 2%
• Structured finance volume 2009 almost twice 2008
• TC placed USDeq 791 million in RMBS 2009, more than half of recent issues purchased by domestic pension funds
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Contact Info:W. Britt Gwinner
Principal Financial Specialist
International Finance Corporation
Miguel Dasso 104, Piso 5
San Isidro, Lima 27, Perú
+51 1 611-2573