Commercial Property Confidence (CPCI): Let's see how the market feels 18 months on

It is now almost 18 months ago since we ran our last commercial property confidence survey. At that stage we were seeing an increasing emphasis being given to underlying property fundamentals. It is important, if not critical, to gauge the direction in which the market believes some of these key issues are moving and to this end the commercial property confidence survey aims to give consideration to these aspects: Eighteen months ago, the eProp CPCI index appeared to be struggling to find direction having effectively deteriorated, reaching a level of 42 as at August/September 2010 compared with a reading of 47 at February/March 2010. With 50 being neutral, the reading was largely negative, but nevertheless a little better than the levels of 36 and 37 registered in the same periods in 2009. The CPCI cycle trend suggests that the peak was reached in early 2006. The bi-annual eProp Commercial Property Confidence Index (CPCI) Survey is based on a mix of ten equally weighted variables comprising both `hard' and `soft' business conditions; the index reflects a six month forward projection for the commercial property sector. From a sector perspective and on a net balance basis (ranging from +100 to -100 with 0 being neutral), both the office and industrial sectors worsened marginally. The Office sector's net balance reading in August/September 2010 was at -9, down from zero 6 months prior; the industrial sector showed a reading of -22 from -1 six months prior to this. Although retail remained negative at -17 this was the only sector to have shown a small improvement on the period six months prior, where the reading was at -23. This was the sixth consecutive negative outlook for retail commencing in Feb/March 2008 albeit up from its lowest level of -42 reached in 2009. In terms of the ten issues constituting the index, seven issues remained negative, two held a positive outlook on aggregate with one aspect exactly neutral. On the positive front it was the number of leases and sales - albeit only just positive - with 5 and 8 percent of respondents respectively anticipating any improvement. Sale prices were expected to remain static, not withstanding that a net balance of 23 percent of respondents expected capitalization rates to rise. At the time, monetary policy supported this outlook given that the prime interest rate reached its lowest levels in recent history; however this too can still rise in 2012 although the any clear prognosis therefore remains murky at best. In line with the softening yields score representing the second most negative response, 23 percent of respondents anticipated that staff levels would reduce 18 months back. True to form, the factor considered most negative remained the outlook for the management of the public environment in which assets are located in. There has been a fair amount of focus on municipal management of late and it will be interesting to see if this arena is still spiraling for investors and property managers. The outlook for vacancies remained negative at -13 percent, although it has to be said that this was up from the -67 percent recorded a year back. Net operating income was anticipated to come down as evidenced by a net balance of 18 percent of respondents. Retrospectively we see that the eProp CPCI is a very useful barometer for commercial property and business conditions and has been very accurate in terms of market movement.

Soros plan for ESM and EFSF to guarantee ECB loans and reduce cost of sovereign debt

How to pull Italy and Spain back from the edge

The longer-term refinancing operations launched by the European Central Bank in December
have relieved the liquidity problems of European banks, but not the financing disadvantage of the highly indebted member states. Since high-risk premiums on government bonds endanger banks' capital adequacy, half a
solution is not enough. It leaves half the eurozone relegated to the status of developing countries that became highly indebted in a foreign currency. Instead of the International Monetary Fund, Germany is acting as the
taskmaster imposing fiscal discipline. This will generate tensions that could destroy the European Union.

I have proposed a plan (http://blogs.ft.com/the-a-list/2011/11/21/the-ecb-must-step-in-to-save-the-eurozone), inspired by Tomasso Padoa-Schioppa, the Italian central banker, that would allow Italy and Spain to refinance their debt by issuing treasury bills at about 1 per cent. It is complicated, but legally and technically sound.

The authorities rejected my plan <http://www.ft.com/cms/s/0/87157274-4676-11e1-89a8-00144feabdc0.html> in favour of the LTRO. The difference between the two schemes is that mine would provide instant relief to Italy and Spain, while the LTRO allows Italian and Spanish banks to engage in a very profitable and practically
riskless arbitrage but has kept government bonds hovering on the edge of a precipice - though the last few days brought some relief.

My proposal is to use the European Financial Stability Facility and the European Stability Mechanism to insure the ECB against the solvency risk on any newly issued Italian or Spanish treasury bills they may buy from
commercial banks. This would allow the European Banking Authority to treat the T-bills as the equivalent of cash, since they could be sold to the ECB at any time. Banks would then find it advantageous to hold their surplus liquidity in the form of T-bills as long as these bills yielded more than bank deposits held at the ECB. Italy and Spain would then be able to refinance their debt at close to the deposit rate of the ECB, which is currently 1 per cent on mandatory reserves and 25 basis points on excess reserve accounts. This would greatly improve the sustainability of their debt. Italy, for instance, would see its average cost of borrowing decline rather than increase from the current 4.3 per cent. Confidence would gradually return, yields on outstanding bonds would decline, banks would no longer be penalised for owning Italian government bonds and Italy would regain market access at more reasonable interest rates.

One obvious objection is that this would reduce the average maturity of Italian and Spanish debt. I argue that, on the contrary, this would be an advantage in current exceptional circumstances, because it would keep governments on a short leash; they could not afford to lose the ECB facility. In Italy, it would deter Silvio Berlusconi from toppling Mario Monti - if he triggered an election he would be punished by voters.

The EFSF would have practically unlimited capacity to insure T-bills because no country could default as long as the scheme is in operation. Nor could a country abuse the privilege: it would be automatically withdrawn and the
country's cost of borrowing would immediately rise.

My proposal meets both the letter and the spirit of the Lisbon Treaty. The task of the ECB is to provide liquidity to the banks, while the EFSF and ESM are designed to absorb solvency risk. The ECB would not be facilitating
additional borrowing by member countries; it would merely allow them to refinance their debt at a lower cost. Together, the ECB and the EFSF could do what the ECB cannot do on its own: act as a lender of last resort. This would bring temporary relief from a fatal flaw in the design of the euro until member countries can devise a lasting solution.

For the first time in this crisis, the European authorities would undertake an operation with more than sufficient resources. That would come as a positive surprise to the markets and reverse their mood - and markets do
have moods; that is what the authorities have to learn.

Contrary to the current discourse, the long-term solution must provide a stimulus to get Europe out of a deflationary vicious circle: structural reform alone will not do it. The stimulus must come from the EU because
individual countries will be under strict fiscal discipline. It will have to be guaranteed jointly and severally - and that means eurobonds in one guise or another.

The writer is chairman of Soros Fund Management. His latest book is 'Coming Soon: Financial Turmoil in Europe and the United States'

South African real estate a good bet

Investors see Commercial Real Estate as a good bet

Despite our fragile economy, investors are bullish on the prospects for commercial real estate industry in South Africa, said respondents to a last year's poll by SA Commercial Prop News. As 2011 came to a close, some commercial real estate experts found promising signs in often troubled markets. Over the last two years, JSE listed property funds that are heavily committed to commercial portfolios have outperformed almost every other class other than precious metals and raw materials such as iron ore. Latest performance figures from listed property funds confirm that office portfolios have taken a harder knock from job losses and a slower economy than their industrial and retail counterparts. The Retail and Industrial market is gaining interest from investors amid a mixed bag of property-related economic fundamentals such as improvement in employment, infrastructure and business expansions. "Investors continue to view these sectors as an attractive play in delivering steady cash flows driven by solid rental demand," said David Louw, editor of SA Commercial Prop. "As a result, investors view these sector as a hotbed for further investment activity."

Greek Debt Deal Falls Short of What’s Needed to Save Euro: Bloomberg View - Bloomberg

At some point, possibly in the next several weeks, Europe will run into a major flaw in its plan to shore up the region’s finances: Some euro-area governments, such as Greece, simply aren’t going to be able to pay their debts.

The sooner Europe’s leaders recognize this and take appropriate action, the less expensive the solution will be.

This week’s main event in Europe has been a standoff between Greece and its private creditors over the terms of a “voluntary” debt-relief deal. Agreement is crucial to avert a Greek default on a 14.4 billion euro payment due March 20, and to keep open the financing spigot from the European Union and the International Monetary Fund.

Whatever the outcome of those negotiations, though, it won’t solve Greece’s debt problem. TheEuropean Central Bank, the IMF and other official creditors aren’t taking part in the deal, so it will affect only private creditors. They hold about 200 billion euros of Greece’s 338-billion-euronet government debt. In other words, even the 50 percent writedown Greece is seeking will reduce its debt burden by only 100 billion euros, or less than 30 percent.

That’s not enough. Any country’s solvency is a function of its debt load, interest costs, growth rate and fiscal policy. In Greece’s case, assuming an interest rate of 4 percent (the rate it may get out of the debt talks) on its remaining 238 billion euros in debt, and using the IMF’s projections of economic growth, the government would have to run a primary budget surplus(not counting interest payments) of 3.2 percent of gross domestic product indefinitely just to keep its debt burden stable.

Primary Surplus

Don’t count on that happening. Greece has managed to run a primary surplus that large in only six of the past 24 years, when economic growth was much stronger. To meet such a goal now, it would have to reduce its deficit by some 10 billion euros a year, the equivalent of about two-thirds of its spending on social programs.

Portugal, which is not currently in line for debt relief, faces a similarly daunting task. To maintain a stable debt burden, it would have to run a primary surplus of 2 percent of GDP, something it has done in only two of the past 16 years.

The dire state of the two governments’ finances raises a troubling question at a time when German Chancellor Angela Merkel and French President Nicolas Sarkozy are trying to fast- track a new fiscal compact for the 17-nation euro area: How can the agreement, which seeks to toughen budgetary discipline, restore confidence in Europe’s finances if at least two of its signatories are insolvent from day one?

It’s possible that Merkel and her ideological soul mates at the ECB are hoping that, by keeping strapped governments dependent on official financing, they’ll have more power to push through austerity measures. Problem is, heavy debt loads are making the budget-cutting measures much more painful than they need to be -- and probably too painful to put in place.

The likely result: slower growth, greater dependence on official creditors and bigger losses for European taxpayers down the road. Not to mention the deleterious effect the ongoing uncertainty will have on the finances of core euro-area countries, European banks and ultimately the ECB itself. At any moment, doubts about the euro’s survival could trigger a financial catastrophe.

A quicker and more honest reckoning would stand a better chance of stopping the rot and creating the conditions for a successful fiscal union. We have advocated writing down the debts of Greece and Portugal by 70 percent and 40 percent, respectively, leaving them with the much more realistic task of achieving primary surpluses of about 1 percent of GDP. This can be done only if official creditors take losses alongside their private counterparts. With all euro-area governments on a solvent footing, the ECB could then step in with credible guarantees to recapitalize banks and calm market jitters.

All these elements will eventually be needed if the euro is to survive. Enacting them now would dramatically increase the chances of success.

Read more opinion online from Bloomberg View.

To contact the Bloomberg View editorial board: view@bloomberg.net.

Rising Investment In French Commercial Property

During the final three months of 2011, France recorded its highest commercial property transaction volume since the third quarter of 2007.

Figures released by CB Richard Ellis (CBRE) revealed that investment in French commercial real estate climbed by 65 per cent between the third and fourth quarters of last year.

In total, €6.5 billion (£5.4 billion) was transacted between October and December 2011, making it the second most popular market in Europe after the UK.

The CBRE report stated: "Investment activity in France was heavily biased towards the Paris office sector and included large portfolio and single-asset deals."

According to the Savills European Office Markets bulletin released in autumn last year, yields for Parisian offices stood at just over five per cent in the third quarter of 2011.

The organisation noted that both demand and rents were on an upward trend at this time, while the supply of such real estate assets in the French capital was falling.

Head of Europe, the Middle East and Africa capital markets at CBRE Jonathan Hull stated that data from the final quarter indicates France, along with the UK, Germany and the Nordic nations, "are key to core strategies" among investors.

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Foreigners Snap Up Swiss Property - WSJ.com

By GORAN MIJUK

ZURICH—With average house prices nearing 800,000 francs, the Swiss residential real-estate market continues to boom. Market participants say there is no end in sight as cash-rich Europeans and Russians keen to protect their assets fuel demand.

"I'm getting calls from Greek investors almost every day who want to buy a house here," says Robert Ferfecki, managing director for Sotheby's International Realty Inc. in Zurich, who is selling luxury homes in the German-speaking areas of Switzerland, including Zurich and Lucerne.

"Had Switzerland no restrictive property laws that limit what foreigners can buy, I would probably be able to sell my portfolio within a week," Mr. Ferfecki says, noting that Germans and Britons are the top buyers.

Unlike property markets in the U.S. and many European countries, which are still smarting from the 2008 housing collapse, prices for all categories of Swiss real estate have risen steadily over the past three years, according to consultancy Wuest & Partner AG.

Prices for family homes, for example, have risen some 20% since 2008 to an average of 780,000 francs, or $830,000, the consultancy says. Also boosting the market are record-low mortgage interest rates, which hover at 2.7%, after the Swiss National Bank cut its key interest rates close to zero last summer.

Fanning the boom is a steady influx of foreigners attracted by the strong economy, Wuest & Partner says. Over the past four years, Switzerland has seen a net influx of about 330,000 foreigners, according to the national homeowners' association, HEV Schweiz.

Most are highly skilled workers from Germany, the U.K. and France, who are drawn by Switzerland's strong job market. Unemployment was 3.3% in December.

Mr. Ferfecki of Sotheby's says the financial crisis has also triggered interest from cash-rich Europeans and Russians, who want to park some of their assets in Switzerland to shield themselves from a potential breakup of the euro zone and benefit from the country's stability, as well as its low taxes, which can be less than 10% of a person's income.

In recent years, billionaires from the former Soviet Union, including Coalco Metals Ltd. owner Vasily Anisimov and Viktor Vekselberg, chairman of commodities company Renova Group, have moved to Switzerland. Dinara Kulibayeva, the daughter of Kazakh President Nursultan Nasarbeyev, reportedly paid 74.4 million francs for a villa at Lake Geneva in 2009.

"What really makes these people come to Switzerland isn't just the low taxes, but the quality of life and the stable rule of law," Mr. Ferfecki says. "They don't need huge security and can go shopping without being recognized."

But because Switzerland's property laws are restrictive for non-resident foreigners—only about 2,000 homes can be sold to non-residents every year—foreign investors who are unwilling to live in Switzerland but want to benefit from the market's strength have started to build up investments in Swiss real-estate funds and property companies.

Shares in Swiss funds such as PSP Swiss Property AG, Swiss Prime Site AG and Mobimo Holding AG, which own residential and commercial real estate in Switzerland, have sharply outperformed the Swiss stock market. Stocks overall have lost more than 7% over the past 12 months, while property stocks have gained between 1% and 4%.

"What our international investors like about us is the fact that we are a pure Swiss play," says Luciano Gabriel, chief executive officer of PSP Swiss Property. "Since we have no operations outside Switzerland, our business depends on the Swiss economy and investors have an almost pure Swiss franc investment that isn't linked to other risks." Because of the international interest, Mr. Gabriel says, PSP holds annual investor events in the Netherlands, the U.S. and the U.K.

This investor demand, coupled with Switzerland's still sound economic outlook—the government expects the economy to grow by 1.9% in 2013 after moderate growth this year—prompted Mobimo to seek 200 million francs in fresh capital last month to finance new projects. UBS AG and fund manager Swisscanto Holding AG both recently raised money for their respective Swiss real-estate-fund businesses, financing new projects in the country and spurring a building boom.

According to the Swiss government, real-estate projects worth 63.7 billion francs were launched last year, the bulk financed by private investors. This is up 3% from 2010, when 61.92 billion francs' worth of projects were planned.

"We are certainly in a boom phase," says Thomas Vonaesch, head of real-estate fund management at Credit Suisse Group, which controls around 14.4 billion francs of real-estate assets. "And demand is expected to remain sound as the financial environment with low interest rates is expected to drive demand."

UBS's Swiss Real Estate Bubble Index, which tries to measure signs of the market overheating, rose in the third quarter but showed no sign of a bubble, according to the bank. Bank Vontobel real-estate analyst Stefan Schuermann says prices will continue to rise "as investors have nowhere else to go."

He argues that Switzerland's housing market won't go the way of that of the U.S., as mortgages are usually backed by a 30% deposit. "This makes this market safe and price development stable," he says.

Write to Goran Mijuk at goran.mijuk@dowjones.com

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