Robin van Puyenbroeck 0:07
Welcome back to Trade Wins. This is Robin van Puyenbroeck and my guest today is Ed Allison-Wright, Director at Fairhomes Group in Gibraltar. Ed, welcome to the show.
Ed Allison-Wright 0:19
Thanks very much, Robin.
Robin van Puyenbroeck 0:21
I wanted to get your perspective on something here. We’re seeing rising interest rates, peak inflation, I even saw the term “stagflation” for the first time in decades. We, of course, see massive supply chain issues, shortages of labor and raw materials alike. If you read the news today, of course, the geopolitical tensions are also not getting any better here, so it’s like a perfect storm. It may be a bit of a broad question, but what does this all mean for real estate, and maybe specifically for commercial real estate. Adding to the storm, the work habits of people have changed as well.
Ed Allison-Wright 0:58
It presents quite a lot of interesting implications to real estate. When we look at these challenges, the fact that they’re all happening at once is an interesting thing to note. When you look at say the U.S. for example, they’ve now got sort of three macro extremes happening at the same time, being the debt problem of the 40s, the rising inflationary environment of the 70s, and also the excessive financial asset valuations of the late 90s, so you’ve almost got a perfect trio of events lining up at the same time, which means that it’s probably harder for corrections to be manifested through policy. That means, from a real estate perspective, we’re in a challenging but potentially quite interesting environment where it means that transactions may be more likely to happen over the next 12 months, 24 months. As we are a sort of cyclical contrarian investor, we look for distress in markets. Whilst it’s potentially worrying that there may be a correction after a period of maybe 12 to 24 months, it does present us with opportunities so we can reinvest into markets that find some elements of distress.
Robin van Puyenbroeck 2:16
You’re focusing on that distress, of course, and high debt. What’s the correlation here between the commercial market and the residential market? Yesterday, I was talking to someone from large funds who’s very big now into multi-family homes, and Fairhomes is also into that residential segment, so is the future a place where large investors will dominate the residential market?
Ed Allison-Wright 2:42
Different parts of the residential market, yes. If we take the U.K. as an example, the U.K. began (probably since 2014) to follow the U.S. and certain parts of Europe, say German models where homeownership becomes not so important and rental markets end up becoming more of a trend. We see that with millennials and the younger, in terms of generations, where they’re not as fast in owning. What we’ve seen in the U.K. is that marketplace has historically always been sort of private landlords that want to own property and residential real estate and rent it as an investment. Now that becomes more of an institutionalized practice where big investors come in and end up owning swathes of rental property, which they can build to rent and for that sort of purpose, build rental accommodation. So yeah, you’re right. You’re finding that perhaps as the stresses in the wider market take hold, big private equity firms and investment funds want an area of safety to invest money and they find that residential real estate is one of them.
Robin van Puyenbroeck 4:00
Do you think that younger generations, that the whole notion of homeownership—which is sort of the real issue—like brick and mortar of many places around the world, that that’s gone? That the young people today, new generations, younger generations just don’t see the value anymore in owning that piece of brick and mortar? With interest rates going up, is it less risky, are there other venues to park money to invest, to save money rather than just going through a 20-, 30-year mortgage cycle? Is that also a fundamental shift?
Ed Allison-Wright 4:30
I don’t know whether it’s a shift out of choice or out of necessity. A lot of people that we’ve talked about, whether they’re in the position to own a home or not is another question, but what they’ve ended up doing is adapting. You find that homeownership just doesn’t become such an important aspiration and the markets, I think, followed that sort of aspirational change, whether it’s for want or for lack of ability to buy. What we’ve seen also is that sort of trend is beginning to take place in the commercial markets as well. As a result of the pandemic, for example, the fact that you can work remotely now means that a lot of businesses end up consolidating what they have in terms of office space because they know that they might be able to provide, you know, space with 150% capacity, which means essentially, you’d never have everyone in the office at the same time, which means that, therefore, you don’t need an office that’s capable of housing everyone. So there is cost savings on that, that side of the equation. But then, you know, playing devil’s advocate, you also, we’re seeing a lot of companies that actually increase the space that they have, but they’re just using their space differently. And it might be that instead of having, you know, all of these hot desks where people come in and work in front of screens all day, they pay a lot more attention to co-working space and space in which teams can brainstorm and discuss things and socialize with each other to help build that creative side of a business.
Robin van Puyenbroeck 6:05
No, no, I think that’s definitely something we see here in New York as well happening, more space for fewer people at the same time, but the space has definitely been utilized. Maybe coming back, briefly Ed to your contrarian investor. You just said, oh, we’re looking at distressed assets and you said a 12- to 24-month window. I know you don’t have a crystal ball, but that’s very near term. When is the market going to be in distress for you to move?
Ed Allison-Wright 6:35
We see that to occur after this 12-month to 24-month period. This 12- to 24- month period is basically the wash coming from a lot of quantitative easing throughout markets. All the money that was plowed into employers that were out of work or into businesses so that they can keep employees in work, I think will last us for a period – which is undefined, but probably over a year. We’re in the process, for instance, — just to give you an idea of what our mindset is — in markets where we have developments that we look to sell, we’re looking to sell those in this period where people still have disposable income that they had from the pandemic. At that time in which that sort of begins to dry up (which might be between sort of 12 and 18 months away, perhaps), we might begin to see some stresses emerge, especially when you probably have a peak in interest rates over the next probably 12 to 36 months, I should imagine. The good news is that, in the long term after pandemics — they mapped about 19 pandemics onto a chart once and they sort of identified that usually, you find a decrease in rates over a longer period. But certainly in the short term, we’ll find a little spike come up, and we see that to be the next 12 to 36 months, perhaps, which presents us with those opportunities because a load of investors would have been running quite close to the line and the pushing up of those rates might put them in some difficulty from a financing perspective.
Robin van Puyenbroeck 8:18
Of course, right now, there is very little room to decrease rates, or something will have to go up before it can go down again. Maybe a final question, do you see any differences in different parts of the world because of the coordination between countries or regions, if it comes to monetary policy easing, given the geopolitical context that we’re operating in today, do you see any major shifts where certain countries would just go their own way? And would that have an impact on the market, as well? I think about oversupply in certain markets, different views on easing and other needs.
Ed Allison-Wright 8:56
That’s an interesting question. I tend to think actually, that the pattern might be slightly more simplistic to follow. From a real estate perspective, I think it will follow the areas that are more sort of second home heavy. So from North America’s perspective, you’re probably looking at Florida, for instance, as your sort of second home market. In Europe, you probably look at Southern Spain being one of the second home markets as an example or southern Portugal, those second-home markets tend to be the first to go just because usually the development is excessive. So it tends to be very definitive cycles compared to other markets where, for instance, parts of southern southeast England in the U.K. had any adjustment after 2008 despite lots of other parts of the country happening that so it won’t necessarily be country-specific, but I think it will probably follow second home areas most definitively. And I mean, one of the other interesting things that we’ve seen in the last few months has also been the cost inflation and what that’s done as a sort of as a knock-on effect in markets. So for instance, in Florida, we’ve been selling a load of rental properties, we ended up owning about 650 rental properties, which we’ve been selling. And we ended up holding that strategy because the cost inflation of building property was so high, you know, 400% in some areas, that people ended up just paying significant amounts more for an existing property, rather than the plots that they could build their own homes on just as a result of that cost inflation. So some of those indirect impacts made some big changes to our strategies when we’re selling and retaining stock in the U.S, for instance,
Robin van Puyenbroeck 10:42
That’s very interesting, 400%. Of course, not a small change. That goes right into your operating margin. That was good. Great, thank you so much for sharing this here this morning and I look forward to continuing this conversation. Thanks so much, Ed.
Ed Allison-Wright 10:56
Robin van Puyenbroeck 10:58
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