Unreal estate – Some property investors appear to have forgotten a very recent history lesson


Jamie Lowry

Jamie Lowry

Fund Manager, Equity Value

The “general feeling the world of debt is losing touch with reality”, to which we recently referred in Bonderland, is by no means limited to government bonds – the primary focus of that piece. Take, for example, this Financial Times article, which suggests property investors might be growing a shade too relaxed about the risks associated with taking on elevated levels of debt.

“Property investors’ appetite for debt finance has risen sharply in recent months as intense competition to buy assets drives them to seek higher, riskier returns,” says the article before noting more than half of all loan requests made to UK commercial real estate financiers in the six months to 31 March were for loan-to-value ratios of more than 65% – almost double the 35% recorded in the previous period.

It would be hard to read of such things and not be reminded of how the UK commercial property sector crashed in the wake of the global financial crisis. Indeed, in the years that followed the crisis, financiers were unwilling to lend more than 60% of the value of a property. That figure rose to 65% last year, however, and one market-watcher told the FT it is now edging closer to 70%.

“The rise in demand for highly leveraged debt is the latest sign that property investors are keen to take on more risk,” the FT article observes – a trend that inevitably increases the threat of a real estate bubble. Nor, of course, is such a threat limited to the UK, with research provider MSCI quoted as describing the pricing of real estate around the globe as “increasingly aggressive”.

Another indication things are becoming a little heated can be found in reports of so-called ‘ratings shopping’ in the US property market, such as this one from Bloomberg. Apparently some loan underwriters have started to bypass the three major rating agencies – Fitch, Moody’s and Standard & Poor’s – for the sin of demanding “the securities be structured to offer more protection from defaults”.

Instead, some banks are favouring, as Bloomberg puts it, “upstarts that are more willing to give higher grades”. One senior banker is quoted as suggesting certain investors do not care which rating agency they use because “they just need a single rating, whoever it is”. This situation he describes, in a splendid piece of understatement, as “not the ideal state of the world”.

It certainly is not. The Bloomberg articles highlights data from Credit Suisse that shows loan-to-value ratios threatening to reach levels not seen since – you guessed it – the 2007 credit bubble while, according to Moody’s “loan-to-value ratios of 117% this year are just one percentage point less than where they were in 2007”.

Sometimes history does not even go to the effort of trying to rhyme – it really does just repeat itself.


Jamie Lowry

Jamie Lowry

Fund Manager, Equity Value

I joined Schroders in 2004 as an equity analyst in the European Equity Team initially specializing in the Industrial sectors before moving on to Consumer-based companies and finally Insurance. In 2007, I became a co-manager on a fund investing in undervalued European companies and took on sole responsibility for the fund in May 2010. Prior to joining Schroders, I worked at Hedley & Co Stockbrokers and Deutsche Asset Management as a trainee analyst.

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