Personal Responsibility, the Credit Crunch and Recession

Dear Investor

I have just returned from Cyprus where the weather has been fantastic, hitting 29C most days. My primary reason for visiting was to see the Grove Spa Resort which is presently being handed over to clients. The scheme is unique for the island and standing on-site made me immensely proud of what we have achieved.

“I want to let you all know we are really pleased with our investment after our visit to Cyprus 2 weeks ago. The apartment has a high quality design and finish and the fitted furniture and appliances will meet the expectations of renters. I was impressed by the design and construction of the communal areas and the spa and gym will be wonderful.” Mr Graham Kirk

Our clients who have been on-site and taken possession of their properties have been extremely positive and can see the reality of something truly unique in the Cyprus property market.

This delight emanates not just from having turned our vision into reality, but also from the significant hurdles we have cleared along the way, most of which have been beyond our control. The Grove Spa Resort began as a plot of land we bought about 4 years ago, to see the Grove Spa Resort now click here. The world in 2006 was significantly different from the one in which we find ourselves today. Property prices were climbing as banks lent freely and the appetite for global real estate was insatiable.

I am reminded of the events of September 2008 as I write this newsletter. I was at my home in Larnaca as what became known as the Credit Crunch struck. Here’s reminder of some of the key events from that month:

• The UK Treasury attempt to reinvigorate the property market by introducing a one year stamp duty holiday for properties valued at £175,000 or less.
• The Organisation for Economic Cooperation and Development (OECD) forecasts that the UK economy will go into recession.
• The FTSE experiences its biggest weekly fall since July 2002.
• Halifax predicts the credit crunch will last until 2010.
• Fannie Mae and Freddie Mac are rescued by the US Government.
• Nationwide merges with Derbyshire and Cheshire Building Societies.
• According to the Royal Institution of Chartered Surveyors (RICS), the numbers of property sales and first-time buyers hit record lows.
• Lehman Brothers announces huge losses and files for bankruptcy a few days later.
• Merrill Lynch is taken over by the Bank of America for $50 billion.
• AIG, the largest insurance company in the US and sponsor of Manchester United, is given a $85 billion rescue package to prevent bankruptcy.
• Washington Mutual is closed and sold to JPMorgan Chase.
• In Europe Fortis, a major Dutch bank, is partly nationalised.
• In the UK, HBOS and Lloyds TSB merge.
• Bradford & Bingley is nationalised.
• The economy of Iceland starts to crumble.
• Wachovia is bought by Citigroup.

Further, in Q4 2008, the FTSE 100 experienced some of its biggest one day losses in history as investors around the globe panic.

I remember the month very well because, as a result of the global meltdown, we formed Distressed Assets to concentrate on opportunities which would inevitably arise out of the chaos in the UK. This proved to be perfect timing as the past couple of years have provided some of the best opportunities in decades for property investors.

Since the Credit Crunch we have experienced the worst economic decline since the Wall Street Crash of 1929. The recession has been deep, affected many people and some of whom are still not out of the woods. I have personally seen a decline in the value of some land I bought, whilst also seeing increases in others due to local factors. I made decisions based on experience and stand by those decisions today. No one – yes, no one – foresaw the Credit Crunch. Not even the banks which bought and sold the Collateralised Debt Obligations (CDOs) which caused the mess in the first place saw the writing on the wall.

I would prefer not to have land which has gone down in value, but I made the decision, stand by it and will continue to meet my obligations. Experience and also economic history tells me that I will make a good profit from that land in the future but it’s a waiting game. I do not blame my paper losses on the person who sold me the land or the bank which lent me the money. It was my decision, my contract and my signature. I can’t just walk away and pretend I didn’t buy it.

The Credit Crunch and recession have just delayed my profits for a while. I had a similar experience in the last major property recession with new build property in Luton which was in negative equity for 6 years, but eventually sold at a healthy profit 10 years after the original purchase. Patience and management is the key to success.

There are a number of court cases presently beginning in the UK which developers are bringing against buyers who have not fulfilled their obligations.  It was summed up by a developer friend of mine recently. He asked a buyer who had not honoured his contracts to buy his off-plan UK properties:

“Would you have given me the profits from your properties if there hadn’t been the Credit Crunch and recession?”

“Well no, why would I?” said the buyer.

“Then why do you want me to take your losses now?”

He has taken the buyer to court for breach of contract and is suing for substantial damages which recent cases suggest he will win.

It’s not just developers who build properties based on signed legal contracts who suffer. Buyers who bought in good faith and fulfil their commitments also suffer as less cash is available for the developer to deliver and in some cases I have seen recently, complete schemes have stopped in their tracks around the globe, leaving the buyers stranded and out of pocket. These are difficult times for all but the legal framework is robust enough to deal with those in breach of contract and developers around the world are taking strong action to protect their own and their clients’ rights.

On a wider economic front, many businesses have gone into receivership and others have lost money as a result. The recession and its aftermath have been on a scale not seen in living memory. Those who have traded through this period are stronger as a result and like us, are seizing the opportunities left by others. Governments have suffered too; deficit reduction plans are the vogue as public expenditure is reined in and lower tax receipts and increased welfare benefits also take their toll on government finances.

I am still amazed when people speak about their investments or businesses as if none of the above had happened; as if they went to sleep one day in 2007 and awoke yesterday expecting everything to be the same. It is not. Life is significantly different and we all have to adapt to the new world order, so to speak.

Many government projects around the world have been scrapped as a result of straightened finances. Whether water parks in Florida or infrastructure projects in Bulgaria, what was on the table 3 years ago may now be confined to the dustbin. No amount of self pity or wishful thinking is going to change that.  So, if you have a villa in Florida, concentrate on increasing the occupancy in difficult times, not putting your energies into blaming the realtor who sold it to you.

The motto of the story is that the world has changed dramatically over the past 3-4 years. We all made decisions based on the available evidence at the time; whether governments, businesses, banks or property investors. It has been a hard few years for many individuals and businesses, including property developers, many of whom are no longer trading and whose clients have lost a lot of money as a result. As a property developer who has traded through the crisis and delivered, I am looking forward to the next decade as markets recover and move to new highs – that’s what history tells us and it has a knack of repeating itself.

But for those investors who entered the market late, inspired by the blanket media coverage of the benefits of investing in property, keep your nerve and don’t become a distressed seller. Property is a long-term investment and performs admirably over time. We hit the buffers with recent economic events, but it will not always be like this. If you can, then invest in distressed property as a hedge to your other investments. Many have benefited from some startling capital gains.  There are many opportunities out there for the savvy investor.

In the meantime, those who see the glass half-full and not half-empty will be the winners as markets recover around the globe. It was reported yesterday that the UK experienced its strongest Q3 growth rate of 0.8% in a decade. This brings annual growth back to trend at 2.8% and although austerity measures have yet to kick in, the outlook is positive and talk of double dip recession is looking less credible. As ever, economic events are fluid and in these historical times, events are difficult to predict. But one thing is for certain, we will emerge from the past few years stronger and history tells us that asset values will return to growth.  It’s just a question of when.

Best wishes,

Dominic Farrell