Juggling Dynamite

Historically, downcycles in real estate have led to the harshest economic downturns. This cycle is global and highly interconnected.

Charlie Bobrinskoy, Ariel Investments vice chair and head of the investment group, joins ‘The Exchange’ to discuss the ripple effects of China’s real estate issue on U.S. markets, which sectors would be most impacted, and more. Here is a direct video link.

Thirteen years of ‘easy money’ spurred debt complacency and a global credit boom that inflated asset prices, particularly real estate, worldwide. Now, higher rates are triggering the great unwind in a dash to reduce overhead and raise cash everywhere, all at once.

Countries that saw the most significant influx of foreign investment and property appreciation- places like Canada, Australia, New Zealand, Hong Kong, and the U.K.- are most vulnerable as buyers that helped inflate housing bubbles look to sell.

Chinese investors who bought properties abroad are facing a double whammy as they contend with an economic slowdown at home and surging interest rates across the globe. See Chinese Investors Struggle to Hold on to Properties Abroad as  Soaring Interest Rates, Weak Domestic Economy Make Mortgages Unfordable:

In a growing number of cases, they are having to sell their overseas property, unable to free up the funds to service the higher mortgage repayments.

The property crisis at home has shaken confidence, denting spending on homes as developers struggle to repay debts and deliver residential projects on time.

In December, prices of new homes in 70 medium and large cities fell 0.4 percent month on month after a 0.3 percent drop in November, according to official data. It was the steepest monthly decline in new-home prices since February 2015.

Real estate investment in terms of value fell by 9.6 percent to 11.09 trillion yuan (US$1.5 trillion) last year, about the same as the decline in 2022.

Some overseas markets have seen a dramatic fall in the number of Chinese homebuyers as spiralling interest rates and the economic woes at home have made leveraged property purchases less affordable.

2024 is a big year for commercial real estate refinancing (US loans maturing by year graphed below, via Liz Ann Saunders). Interest rates, insurance, taxes and ongoing maintenance costs are on the rise as occupancy rates decline. Investors who bought and held when prices were high are now selling at huge discounts to cut their negative carry and risk exposure; see Office Tower deal for $1 Reveals Anxiety Among Longtime Buyers:

Canadian pension funds have been among the world’s most prolific buyers of real estate, starting a revolution that inspired retirement plans around the globe to emulate them. Now the largest of them is taking steps to limit its exposure to the most-beleaguered property type — office buildings.

Canada Pension Plan Investment Board has done three deals at discounted prices, selling its interests in a pair of Vancouver towers, a business park in Southern California and a redevelopment project in Manhattan, with the New York stake offloaded for the eyebrow-raising price of just $1. The worry is those deals may set an example for other major investors seeking a way out of the turmoil too.

As usual, those who profited during the boom phase are now raising the alarm and seeking ‘help’ from governments as mean reversion spreads.

John Fish, Real Estate Roundtable Chairman and Suffolk Founder, Chairman and CEO, dives into the main concerns facing commercial real estate and why he believes the mood on the ground is “sombre.”