Guest blogger: Bruce Dear, Head of London Real Estate, Eversheds LLP.
"Looks more like Clacton than the Cote d'Azur." I'm on the TGV rolling into Cannes and the sky is (well) English coloured and (feel it!) the air is thermal vest cold.
But by the time of my first morning coffee with an institutional client (new funds and investments) at Le Claridge, off the Croisette (don't be fooled by the name-more Le Greasy Cuillere than cordon bleu), the sky is an uplifting Mediterranean blue.
The air is thick with Hang Over Busting fried food and humming conversations at crammed tables: I over hear ideas for hotels in receivership on the Liffey and HQ offices in the Thames Valley. This week the market is made by these hundreds of individual encounters.
What does the market feel like in Cannes? Optimism first. The European banks have just filled their liquidity buckets at the European Central Bank's fire hydrant. They took €530 billion in the ECB's last round of LTRO (long term refinancing operation). They have used the money to pay off their debts, buy government stock and a narrow range of corporate bonds and to improve their capital position. For the moment, the possibility of a European banking failure has been hugely reduced and the Eurozone has a breathing space to make the necessary political and structural reforms.
Quantitative easing has done a similar job in the UK. Without QE, (per Paul Tucker, Head of Financial Stability at the Bank of England), "the UK economy would have been destroyed" (think of that next time you moan about QE causing low interest rates on your savings).
So, (surprisingly given the current reputation of all bankers), Central Bankers have actually saved us from the economic abyss. We now have a stable (mildly recessionary) economic platform, subject to some material risks (especially Greek default), but not about to sink. It's always dangerous to make predictions, but I think that this slow stability will now obtain throughout this year and next (write to me care of EG when we have Lehmans Mark II in October!).
How should the Property Market use these days of relative calm?
Well, now a dash of pessimism in your Cappuccino. We are living through a long deleveraging. Banks aren't lending and governments aren't spending. This means that the two main engines of the real estate market are not just slowing, but have been put, quite deliberately, into reverse.
OK you say, pessimism's easy, but what should we do? Well, here are two possibilities and I will post many more this afternoon, once we have held our major Future of the Market Seminar (over a hundred key attendees and panellists from L and G, Swedish National Pension Fund and Hammerson)
1. Look to new products. Turning your property units trusts and life fund family holdings into PAIFs must make eminent sense. I expect an avalanche of PAIFs in the first three quarters of next year. PAIFs widen your market of investors, taking away the tax disadvantages suffered by pension funds investing into vehicles and opening the ISA and SIPP market. They and other new funds products, such as FAIFs, offer one weapon in a debt and investment constrained market.
2. Try to bring the private and public sector together. The private sector (particularly the major institutions) has the equity and the public sector the assets. The upfront capital value boost, (initially at least), lower than PSBR costs and potential rent share benefits of partnering with the private sector should be highly attractive to the public sector. In my view, the market needs to be much braver and move faster on this. Everyone will get the best partners by dancing early.
We are involved on both sides of this: my senior real estate partner Stephen Sorrell is involved in the ground breaking regeneration partnership between Nottingham Council, Barclays and Waites, my partner Steve Manson and I have been involved in some major structured institutional deals to release large tranches of capital to government and quasi-government entities(universities, social housing bodies etc) and in Birmingham (the UK's only City enterprise zone) my partners Gurj Atwal and David Jones are driving forward a number of major public/private regeneration schemes.
The NAO has just published a report wanting to see better and more adventurous use of the government covenant and there is much that local authority CEOs and HM Treasury (by removing internal barriers) can do to promote the private sector into the public so as to fill the gap left by de-leveraging banks and austerity policies.
There is a chance to speed this process up here at MIPIM. The local authorities are here in force talking to the private sector and there is a sense of urgency in the southern air. Time for the next coffee...
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