Recovery may never mend a broken reputation

Entrepreneurial spirit, with Nick Leslau

It’s almost the anniversary of the weekend that shook the world.

We must never forget how nauseous we felt as global financial markets plummeted in reaction to the possibility we were on the brink of financial annihilation. The ensuing year has been fraught with uncertainty about every aspect of our businesses and, for many, their personal lives.

This manifested itself in some incredibly irrational decision making on the part of the previously calmest of people.

Getting into trouble in such extraordinary circumstances was almost inevitable. The manner in which an individual deals with the trouble and conducts himself to get out of it is what defines him as a business person and human being.

I have been shocked at how some of my peer group have behaved towards colleagues, investors and banks. Panic has caused people to do things they may rue for years. In a moment people forgot that when this storm passes – as it has already started to – they will not be remembered for their stunning bull market deals but for their behaviour when the chips were down. It takes many years to build a reputation but minutes to lose it.

Unthinkable happens
One year hence it is remarkable how the world has changed. International co-ordinated state intervention brought us back from the brink.

It wasn’t cheap, but hang the cost: the alternative was simply unthinkable. When you’re having a heart attack, you don’t stop to wonder how much the hospital is going to cost.

Stock markets are predicting better times. Speculation about a 1930s-style depression has evaporated and there are inflationary concerns as the economy returns to better health than most expected. Yields continue to harden for better-quality stock in every sector. Despite weak tenant demand, the market anticipates an earlier recovery than most – me included – expected.

There remains a concern, however. What of the potential overhang of bank-held or owned assets? Could banks sow the seeds of their own destruction by flooding the markets with stock?

I think not. Banks’ good assets could easily be absorbed into the market, provided they are released over a sensible time period. Problem assets remain unsaleable. Who wants half-completed developments, holes in the ground or one-time investments that are now empty and unlettable? But there is no point in the banks troubling the market with assets for which there is no appetite.

Banks still need to recapitalise their property loan books. This will require a government ‘TARP’-style [the US’s troubled asset relief programme] intervention, or many billion of pounds in further rights issues, or a dramatic rise in values – or any combination of the three. But it looks like this will be played out over many years.

The good news is that the retail funds are cautious buyers again, and quoted property companies have been pulled from the brink of covenant breaches by their rescue rights issues and are also showing signs of looking to buy.

So, paradoxically, the shortage is no longer one of equity, but of available stock. The squeeze is driving values upwards – the first tentative step in relieving the pressure on banks’ loan to values.

Looking back, those who panicked and behaved badly with the banks should expect no quarter. For those calmer souls who continue to work constructively, it will remain tough, but banks do need sensible sponsors to help sort out what are shared problems. So don’t turn your back on your bank. There may well be some equity left for you before long, if the market continues to improve.

One year on the market has done what none of us thought possible: it’s going up. Those who think this is a dead cat bounce look increasingly isolated. Property shares are up an amazing 75%-100% on their March lows. Many world economies registered economic growth last quarter and the UK cannot be far behind. I’m not predicting a bull market – far from it – but a shortage of good stock, banks lending again – albeit selectively – and some Green shoots of recovery.

Now who can complain about that?

(Nick Leslau, Prestbury)


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