Do we have to start thinking radically differently about any investment that has leverage at it's heart?

I can't help but feel the answer to this question is 'yes'. Certainly in the uk and other highly leveraged markets, but even in developing markets the future must look different.

Now that the 'we the people' are to be significant shareholders in some of our biggest banks (with the exception of HSBC who are known to be one of the more conservative banks) I can't help but feel that access to cheap loans will never be the same again.

Even if things go well and the British Government manage to sell our stake what are the chances of the new shareholders being willing to lend as they did in the last 7 years.

They will lend but only to good covenant individuals. Good steady income streams, good deposits and crucially a plan as to how they will pay back the capital. The reliance on property 'always going up', so don't worry about how you pay off the capital' will be history.

This will take millions of people out of the mortgage market and return swathes of Britain to go back to being rental societies.

Hopefully these 'rental societies' will provide good yields for investors but they will not offer strong capital growth. The market will behave more like a commercial property market where properties are valued on yields rather than the quasi commercial / residential market which buy to let has existed in over the last 10 years.

We as investors have to decide are we happy to be in it for the yield or can we do better elsewhere. We will also need to beware of the probable decay of certain of these areas where less and less people have a financial stake in the communities in which they live. Such areas will have to provide higher yields to justify the costs.

Then there will be the better off areas. Places where people can buy there own property. These areas will become better and better and more sought after and limited capital appreciation should follow. They will still want owners to have good levels of equity and there must be a ceiling on growth since of course owners will be expected to have a plan for paying off the capital at the end of the term or to take out a repayment mortgage. Of course yields will be lower in these areas too.

The CEE and other developing markets are different in that as long as their economies rise then there should be the opportunity for property prices to rise in line with this increase in prosperity but even their banks must now be looking at the uk, irish, U.S and Icelandic banks and recognise the need for a cautious approach to lending. That approach will stimy growth.

I recall an article written by PS a couple of years back saying 'The best portfolio building tool has just arrived in Poland' hailing an era of cheaper easier credit from the banks.

I couldn't agree more. Everyone thought the most important thing was the supply (shortage) and demand (high) of property. In fact the most important thing was the easy endless supply of loan capital.

Now that the 'best portfolio building tool' has disappeared - and probably for good surely it's time to take stock.

The key question for me is 'Will it ever be the same again and if so is property the place to be?'

It seems that this is a really fundamental question for this community, so surprising that there are so few comments so far.

In Neil's column 'Investing in unertain times', he's put a contrary view: it's all about value investment for the long term, not fundamentally about the supply of credit. Presumably the answer lies somewhere in the middle and depends on the economy in question as the article alludes. PS makes much of the emerging markets showing good growth without the levels of credit supply seen in Western Europe. On the other hand, easy credit must have helped to drive speculative investing in the more mature economies.

The answer would seem to be to seek out the good value drivers (rising economies, regeneration areas, transport link improvements etc.) wherever they are.

In times of recession we all need to rely on global property cycles to establish where to invest, each country has its own cycle dependent on a many factors political and economic.

For example, the UK has an 12-18yr cycle (18yrs this time thanks to Gordon Brown extending the cycle the way he did - making the crash sooo much worse). We have at least one more year of property price falls in this country and then longer still until developer share price recovers.

If you base your purchasing on economic / property cycles you always sell at the top and buy at the bottom where / when sentiment has already hit rock bottom (but where there are still signs of property company share recovery). It is a long term play, but at least you dont suffer too much when global markets crash, since the market you have purchased into is relatively shock proof since consumer confidence will have already bottomed out, effectively meaning the only way is up.

Base decisions on fundementals, any country that has been experiencing a boom is a bad place to invest since the contraction of FDI will result in a contraction of everything else, growth / jobs / property market (at the end of the respective countries upward phase of their property cycle).

There is no doubt that this is a global recession, it will be those countries that were already at an economic / sentiment low that will recover first since incomes will be low and reform in motion and it will be where FDI will flow as international companies look to cut back and save money.

THIS IS WHY I PURCHASED IN HUNGARY

Sold at the peak of economic cycle in UK and puchased somewhere that had bottomed out.

The credit crunch is nothing new, its just a new name - its just part of the property / economic cycle - artifically extended by the US and UK governments to accomodate the Gulf war. Extended exaggerated boom = bigger crash since property price inflation will always return to the trend line of rate of inflation.

Hi Richard

That all sounds pretty sensible stuff - especially investing based on fundamentals.

The only issue I would take with you is on Hungary.

Do you really believe Hungary has reached the bottom and that it will be among the first countries to recover?!

There may well be great buys on the way in Hungary - but it looks very much as though it has a long way to go down yet!

Hungary is looking increasingly like another Iceland.

Take a look at this latest report from the FT:

http: / /www .ft .com /cms /s /0 /e878a516 -9ae1 -11dd -a653 -000077b07658 .html

Regards

Yes I believe it .... that FT article is a storm in a tea cup, Hungary will come out of this international problem relatively unscathed.

You certainly can't compare Iceland and Hungary's situation since Iceland only has 300,000 people and are heavily invested in the UK retail sector. Hungary has 10 million people and Hungarys banks have very strict lending criteria.

Hi Richard

I don't think it's much to do with banks' lending criteria or the size of a country - it's investor confidence.

I simply can't agree that a non-euro denominated country asking for a bailout from the euro central bank is 'a storm in a teacup.' Some storm - some teacup!

The crucial part of that FT report is this:

"The Hungarian turmoil followed moves by leading Budapest banks to stop or curtail foreign currency lending, the dominant form of credit in Hungary in recent years.

'Concerns then spread that the inflow of foreign currency would drop sharply, so reducing the funds available for financing the country’s current account."

Combine that with a falling currency and you have a problem.

But, who knows, you may well be right - Hungary to emerge unscathed. I just think it has a way to go down yet.

cheers

interesting stuff re Hungary. I invested in a CEE fund that has bought some land in Budapest with the intention of building a large residential site.

However, as the author of the original article under this particular heading I am rather surprised at the lack of debate sparked by the core point. That being the willingness (or even the prevention via new rules that may be created) of banks to start lending at levels that will allow the market to rise quickly or even slightly again and whether international agreements that may be created this time around will mean that other economies will also keep the lid on lending. It is my contention that this is as important as the supply / demand of property itself.

By the way I see that Knight Frank have now, after many quarters of trying to big the uk market up, finally caved in and said that it will be 2015 before London prices get back to 2007 prices - with a further 15% to fall from here. Mind you they also say that now is a good time to buy if you have cash - even tho' they predict another 15% down - ughh?

Benson Elliot Real Estate Partners II Fund by any chance?

Benson Elliot are a very successful at what they do ...... and if so - it is the same site I purchased in.

There are several other big London based property funds looking at deals in Hungary at the moment ... I think they must see the same potential that I do.

Another interesting point is that you will see more and more Hungarian developers / projects advertised at big property investment shows, both here in UK but also overseas. Now that the big Property funds are moving in working with local developers they have the money to advertise the projects effectively internationally. With international exposure comes FDI.

Key point is prices are 20% lower than any of the surrounding countries for equilevant properties in the Capital. Developers have made it clear prices will rise purely due to the cost of materials by at least 20% over the next few years.

Just the fact that prices are unlikely to fall is sufficient to attract investors right now. Since there are so few places that wont fall.

Its a case of "when will it rise" not "how far will it fall".

Hi

Fair points.

My view is this: why believe Knight Frank's specific forecasts rather than anyone else's? I think the economic global picture has become so unpredictable in the last couple of weeks that all bets must be off.

I think specific forecasts of property's performance over the next year or so are without much meaning. What you have to do instead of worry about when recovery will come (and I agree in essence with Richard here), is base decisions on fundamental drivers - and go for a ten year horizon, or longer.

One of those fundamentals is credit supply, no one can deny that. And the question is: will banks be willing to lend sufficiently to drive property markets (and will they be allowed to)?

Personally, my view is that contraction or not, the answer is, yes, they will. Money is like water, it finds a way if a profit can be made. I don't believe governments - and certainly not the UK or US - are stupid enough to curtail credit supply to the point where it isn't worthwhile lending anymore. Banks are there to lend, it's what they do. They will lend if they consider the risk/reward ratio to be acceptable. It's clear that the UK gov at least (and I've no doubt about the US), does not want to see lending overly restricted - they have already made lending at 2007 levels a condition of the bail outs. They just want to make sure there's no more lunatic lending!

Credit conditions must improve - in the meantime there will be some distressed markets and some recovery markets. Which means undoubtedly there will be some great bargains around.

interesting.

I guess the big dilemma in this whole bail out is the mandate (or is it a request?) that the lending levels be returned to 2007 levels. Given that much, possibly most of the lending in 2007 was at lunatic levels the government are in effect asking the banks to cure us with the disease that infected us.

the spiral of decreasing lending standards the banks had got into in the period leading upto 2007 was disastrous.

the problem is that Gordon and Alistair keep going on about the problem being in America and not here. Most sane people now beleive that the problem was everywhere. It was just most acute in Sub prime USA and therefore fell over there first.

they know that if the banks don't get back to lending they will have to prop them up with the £450 billion guarantees they have already comitted. that could break our country. Trouble is that if they get back to lending as they were in 2007 there will be another big bust just around another corner - only even bigger than the one coming.

Rocks and hard places. Take cover.

I bought 40 properties between 1999 and 2001. I stopped then because I saw this coming. I sold 19 of them in April to September this year. i'm hoping to end up with 21 and be debt free.

When I bought, yields were 10% - 15%. For me that will be the signal to come back in. At that point prices in London won't be far off prices in CEE!

How mad is that?

The problem with the buy back in strategy is that our country may well be bust and the £ at record weakness by that time so will it be worth bothering with the uk. It will certainly re-define the idea of buying in at the bottom!

I see China are relaxing rules on buying property over there. I know they too are struggling at present. Does that offer an opportunity in the medium term?

regards