Negative equity - Nicola Laver

Property markets around the world felt the impact of the financial crisis more than other sectors, but there are signs it is slowly recovering.



Economies are slowly creeping out of recession and there is widespread optimism that the green shoots of recovery will not be damaged by the late frosts of global economic fragility. But the property markets may take longer to recover, thanks to the globalisation of just about every aspect of property law.

It is this global factor that has contributed to the disastrous direct impact of the recession on the majority of property markets internationally. But how and why did it all go wrong?

As we know, it started with the failure of the subprime lending market in the US: lenders lent injudiciously to poor, subprime borrowers who had, in reality, little hope of servicing their loans, taking a huge risk based on rising house prices and low interest rates. The risk was too great and the resulting financial chaos filtered insidiously and disastrously into all but the strongest of economies.

This is what caused the crisis in the housing markets in many countries precipitating negative equity and repossessions, and a multitude of property owners unable to sell their homes. The commercial property sector has also been hit hard, with landlords forced to start lowering their rents in an effort to keep tenants in. But the recession means many businesses cannot afford to pay even the lowest of rents and have no alternative but to vacate their business premises, leaving many landlords with a mortgage to pay, no rental income to service it and fewer available buyers.





Wave of maturities

So what was the state of play in the US market in the first quarter of 2010? Steven Wilner, of New York firm Cleary Gottlieb Steen & Hamilton says the commercial market has taken a particularly hard knock. He says: ‘The acquisitions market is virtually dead in terms of trading of properties because there’s very little financing available. There have been a handful of financings that were concluded in the last quarter and half. There is a little bit of pipeline activity but I don’t think there’s a robust market by any stretch of the imagination.’

Yet although he is optimistic that by the end the year there will be more volume and more commercial properties up for sale, he does not foresee a robust lending market. He adds that there’s a spike in mortgage maturities that comes up later this year that runs for about three years and which he believes will be a signifi cant factor in facilitating recovery. He says: ‘I believe it will kick-start the market because people will be faced with the inability to refi nance. Banks will not have the resources to take back the assets and so there will be a move towards banks coordinating or cooperating with the borrowers to arrange for sales in lieu of foreclosures.’

‘That’s not going to happen immediately, but banks will work with borrowers to sell assets, rather than foreclose, which is time-consuming and expensive. This wave of maturities will likely be key to aligning the expectations of buyers and sellers as to price.’

And what about the residential market? Wilner says: ‘The residential markets are a little bit different in that there’s financing available.’ There is greatly reduced volume, he says, but the decline in prices has been mitigated by very expensive units of trade in, for example, New York. The key to kick-starting the residential markets, he says, is the job side: ‘What we are seeing is that the financial sector has had a pretty good year which is feeding the high end of the market. When you extrapolate from New York I think it’s the same story, it’s not just the high end but if people start to feel more secure in their jobs long-term that will help the market. Hopefully, the builders will cut back on the pace at which they’re bringing properties onto the market.’


Terrible timing

The UK property market has fared perhaps a little better. In the fi rst year of the recession, commercial valuations plunged by 40 per cent and the property market still appears precarious despite a recent mini-boom in both commercial and residential property prices which has been followed by a sharp decrease in prices.

And yet the signs of recovery are promising. The Government’s temporary suspension of stamp duty on residential property (a tax paid by buyers on the purchase of a property of £125,000 or more) was regarded by cynics as a token gesture but there is no doubt that the move enabled many buyers to proceed with their purchases, facilitating some movement within the market. And while it was never intended to be a long-term solution, the evidence suggests that the housing market has started to recover slowly.

The UK’s Council for Mortgage Lenders (CML) has been bullish in recent months as to recovery. The CML says: ‘We remain in a period of uncertainty for the housing market and economy at large. The market certainly improved over the second half of last year and started 2010 in better shape than most would have predicted 12 months ago.’ But the Bank of England says it will remain cautious about funding property transactions even when the economy recovers.

‘From October we went from a quiet summer to suddenly all the people who were sitting on their hands since the credit crunch saying they were "open for business" again.’
Simon Price
Herbert Smith


And what is the view from the legal profession? Peter Rodd, Chair of the Law Society’s Property Section Executive Committee, also believes there is considerable uncertainty as to whether the property market is going to improve this year. Speaking ahead of a finely balanced general election in May, he says: ‘There is a lack of property coming on to the market, which is probably helping to firm up prices. There is obvious concern as to the economic situation generally and the effect that this may have on people’s job security. Uncertainty over the election and the possibility of a hung Parliament will do nothing to restore confidence and I doubt that we will see any significant improvement until the middle of the year at least and that may well depend upon the results of the election.’

He adds: ‘Low interest rates are encouraging investors back into the market, on the basis that the stock market is volatile and the interest which they can earn on their money elsewhere is very low. Those who are prepared to take a slightly longer view see property as a safe investment.’

On the commercial side, the signs are more robust. The commercial property market has, according to Simon Price of Herbert Smith, enjoyed a sudden surge in confi dence. Price, a self-confessed optimist, says: ‘From October we went from a quiet summer to suddenly all the people who were sitting on their hands since the credit crunch saying they were “open for business” again.’

This was precipitated, he says, by the perspective that people were seeing signs of stability within the economy and the fact that the institutional funds were becoming net buyers again and not net sellers. He adds: ‘Overall, my optimism for buoyancy in the market is based around the fact that every week we meet somebody new somewhere in the world saying [they] have got a new fund and want to get into the market. What’s happening is that the money is there, but what isn’t there is the quality product – there’s a lack of volume in transactions.’

But what prevailing factors are negating a higher volume? Price says: ‘The general election comes at a terrible time as we have a delicate market where people are nervous that this is a little bubble that will burst. Also, the banks are slowly getting their balance sheets patched up but the availability in credit is improving very slowly.’


Not all bad

With the exception of Asia, there are few countries where the property market has been spared the worst of the effects of a global recession. In Germany, for example, house ownership is less common and many more people rent. Gregor Kleinknecht, of Klein solicitors, says: ‘This has the effect that the property market is not subject to the same amount of volatility as in the UK.’

There have been mixed fortunes in the property markets in the Middle East which, in general terms, suffered a relatively mild crisis. Yet Dubai’s property market was badly hit with house prices reportedly having fallen by half during the recession.

Less-developed regions have fared slightly better. Carolina Zang of Argentina firm Zang, Bergel & Viñes Abogados chairs the IBA Real Estate Committee. She says: ‘Latin America, specifically Argentina, has not suffered the crisis impact as much as developed countries due to the fact that historically, real estate has not benefited from a long-term financing tradition or the access to the capital markets.’

‘In this sense, we usually advise clients in the funding of projects developed through trusts, capital increases or private bonds issuances by companies related to the real estate business or through the creation of new alternatives of financing.’

‘Investment in the real estate sector has not been usually channelled through an active participation of the capital markets or long-term financing, and as a consequence, an insignificant mortgage industry. Therefore, today, we consider that real estate is a healthy and good investment destination.’

In Croatia, Boris Babic of Babic & Partners says: ‘Contrary to what was expected, the crisis has not brought about any significant downward adjustments. The property prices have shown strong resilience to the recession.’

Canada’s property market has largely been cushioned, despite its close geographical proximity to the US. The values in the commercial property market declined only moderately during the peak of the recession and values in the residential property market did not suffer much decline at all. Statistics show that average house prices in Canada rose by nearly 20 per cent last year, partly because of low interest rates combined with government incentives.

Robert Vineberg, of Montreal firm Davies Ward Phillips & Vineberg, explains: ‘The recession has had a negative effect on Canada’s property market but not nearly to the same degree as has been experienced in the US or in certain other countries. There are a variety of reasons for this, including the fact that Canada has a much more “conservative” banking structure than the US does and interest on residential mortgages is not tax deductible in Canada, as it is in the US. As well, it is simply a fact that prices did not get “bid-up” in Canada to nearly the degree that we saw in the US.’

However, there have been recent warnings of a housing bubble which, in the right conditions, could burst. But Vineberg believes the government is merely acting cautiously to forestall any problem before it may arise.

On the commercial front, Vineberg says: ‘There has not been any strong downward or upward movement over the last year or so. One of the reasons for this is that while interest rates are at an historic low, it was significantly more difficult for potential buyers to get loans to acquire commercial properties in the last two years than was the case in the past and, as a result, there have been fewer transactions.’


Impact on the profession

A marked decrease in property transactions means less work for lawyers. The legal profession has shed a mass of fee earners and many casualties are property lawyers. But the largest of firms have survived thanks to their ability to switch resources. Stephen Pilner says the US market has become bifurcated: ‘My firm’s practice has held up reasonably well because we have a very significant restructuring practice so we’ve been able to transfer our resources from acquisitions/dispositions right over to the restructuring side. There are other firms out there with the same profile but firms which were significantly overstaffed in the financing world have been devastated.’ But other, smaller firms have more or less dropped out of the market.

The story is the same in the UK. The evidence is that large firms with access to the international network clearly have greater opportunity to do work for international investors. However, many firms that have had very large-volume property practices with high turnover and low margin work have been decimated as a result of the recession’s impact on the property markets.

So what does the future hold? The signs of optimism within the property markets are clear and substantiated. We have had a harsh winter in more ways than one but the indications for a slow but unhindered recovery are good.


What precipitated the property crisis?

During the housing and credit boom, the volume of mortgage-backed securities greatly increased.

Risky loans to subprime borrowers in the US were based on rising housing prices and low interest rates: if borrowers were to default on their repayments, rising housing prices meant homeowners could remortgage the property or the lender would repossess the property without much loss through negative equity.

Interest rates started to rise, house prices fell, and borrowers defaulted on their mortgages.

US banks sold off their debts to investors via collateralised debt obligations (CDo) to investors around the world who thought it was a great way to generate high returns.

The value of those investments plummeted and banks across the world started to suffer huge multibillion- dollar losses.

Banks had to write off huge sums and couldn’t sell on the poor investments, leading to a financial ‘black hole’ for many financial institutions.

Bank-to-bank lending froze – and the cash available to borrowers dried up.

Buyers couldn’t secure mortgages, sellers couldn’t sell and house prices began to plunge.







Nicola Laver is a former practising lawyer and lecturer in legal practice and is now a legal journalist and writer based near Birmingham. She can be contacted via or by e-mail at

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