Where has all the Liquidity Gone?

6 - 9 October 2008
Dubai International Exhibition Centre

The world‟s largest business to business real estate investment and
development event

Where has all the liquidity gone?

Eric Stoclet
Group Executive Director

www.cityscapeglobal.com

Table of Contents

May you live in interesting times…

Which real estate markets?

Is there any money out there?

What‟s a person to do?

Friday, February 06, 2009

> Taken over or Government > Roskilde Bank bailed out by > Fortis bailed out by Benelux > Real estate projects halted as credit crunch
nationalized: Northern takes over consortium of banks governments pushes rates up
Rock, HBoS, Bradford Glitnir Bank, > Denmark in recession > Dexia bailed out by Belgium > 17/9/08: government to lend 3largest banks -
& Bingley,… country‟s 3rd Sberbank, VTB, and Gazprombank - up to USD
> USD 27 billion largest 44 billion for a minimum of 3 months
Sigma Finance Corp. > 17/09/08: RTS index halts trading after a drop
stops trading and may of 6%
go into receivership > State-owned Vneshekonombank to loan up to
> Commercial real $50 billion to Russian companies to pay back
estate drops 8.6% in foreign debts
the first six months of
‟08 as housing drops
Government
12.4% in last 12
guarantees all
months
Government
bank deposits
29/09/08: Bank of Japan
guarantees
injects 1.9 trillion yen ($17.9
all private
billion).
deposits
> Tourism spending down
30+%
> Real estate crisis main
cause for 11.3% jobless
rate UAE central bank to
offer banks short-term
Credit Agricole to funds through a 50bn-
cut 500 jobs as dirham facility
profits fall 94%

> Financial sector
contribution to GDP Kuwaiti central bank
drops 45% between injects USD 300+ million
9/29/08: trading
Q1 and Q2 ‟08 short-term liquidity
halted as Bovespa
> UBS takes USD 40+
drops 9.75%
billion write downs
> 29/9/08: stock market down
st
> Taken over or nationalized: Bears Stearns, Lehman 4% in 1 15 minutes of trading
HKMA to provide liquidity
Brothers,Merrill, Fannie Mae, Freddy Mac, AIG,IndyMac, > 29/09/08: Reserve Bank of
assistance on request from
WaMu, Wachovia… Australia adds A$2.72 billion
licensed banks for a period of
> Licking their wounds: Citigroup,… > Government negotiates ($2.3 billion) with more than
up to six months
> Running for cover: Morgan Stanley, Goldman Sachs,… EYR 50 billion bail out of A$2 billion a day on average
nd
> 9/29/08: single biggest point drop ever for the Dow: Hypo Real Estate AG, 2 pumped in since Sept. 15
777.68 points largest commercial property
> USD 25 billion government loan to automakers lender
> USD 700 billion government bailout of “Wall Street”??? > Government guarantees all
> Housing drops over 30% in certain areas private deposits
> 159,000 jobs lost in September, 760,000 lost so far in „08
Source: Bloomberg, Reuters, Zawya,, Gulf News, The Wall Street Journal, Noor Islamic Bank PJSC

∞ USD 590.5 billion write downs
∞ USD 352.5 billion capital raised
Firm - Writedown & Loss/ Capital Raised
Citigroup Inc. - 55.1/49.1, Merrill Lynch & Co. - 51.8/29.9, UBS AG - 44.2/28.1, HSBC Holdings Plc - 27.4/3.9,
AIG – 25.0/20.0, Wachovia Corporation - 22.7/11.0, Bank of America Corp. - 21.2/20.7, Lehman Brothers
Holdings Inc. - 18.2/13.9, Freddie Mac - 18.0/13.5, IKB Deutsche Industriebank AG - 15.1/12.5, Washington
Mutual Inc. - 14.8/12.1, Royal Bank of Scotland Group Plc - 14.6 /23.8, Morgan Stanley – 15.7/15.6,
JPMorgan Chase & Co. - 14.3/9.5, Fannie Mae – 12.7/6.0, Deutsche Bank AG - 10.6/3.2, Credit Suisse
Group AG - 10.4/2.7, Ambac – 10.3/1.5, Barclays Plc - 10.1/18.3, Wells Fargo & Company - 10.0/4.0, MBIA
Inc. – 9.4/1.1, Credit Agricole S.A. - 7.9/8.7, Fortis - 7.3/7.1, Bayerische Landesbank - 7.1/0.0, HBOS Plc -
7.0/7.4, ING Groep N.V. - 6.8/4.7, Societe Generale - 6.7/9.6, Canadian Imperial Bank of Commerce - 6.3/2.8,
Mizuho Financial Group Inc. - 5.9/0.0, National City Corp. - 5.4/8.9, Indymac Bancorp Inc - 4.9/0.0, Lloyds
TSB Group Plc - 4.9/4.9, WestLB AG - 4.7/7.4, Dresdner Bank AG - 4.0/0.0, BNP Paribas - 3.9/0.0,
Landesbank Baden-Wurttemberg - 3.8/0.0, Goldman Sachs Group Inc. - 3.8/10.6, E*TRADE Financial Corp.
3.6/2.4, Nomura Holdings Inc. - 3.3/1.1, Natixis - 3.2/6.6, Bear Stearns Companies Inc. - 3.2/0.0, HSH
Nordbank AG - 2.7/1.9, Landesbank Sachsen AG - 2.6/0.0, UniCredit SpA - 2.5/0.0, Commerzbank AG -
2.3/0.0, ABN AMRO Holding NV - 2.3/0.0, Bank of China Ltd - 2.0/0.0, DZ Bank AG - 2.0/0.0, Fifth Third
Bancorp - 1.9/2.6, Bank Hapoalim B.M. - 1.7/2.4, Rabobank - 1.6/0.0, Mitsubishi UFJ Financial Group -
1.6/1.5, Royal Bank of Canada - 1.5/0.0, Marshall & Ilsley Corp. - 1.4/0.0, Alliance & Leicester Plc - 1.3/0.0,
U.S. Bancorp - 1.3/0.0, Dexia SA - 1.2/0.0, KeyCorp -1.2/1.6, Groupe Caisse d'Epargne - 1.2/0.0, Hypo Real
Estate Holding AG - 1.2/0.0, Sovereign Bancorp Inc. - 1.0/1.9, Gulf International Bank - 1.0/1.0, Sumitomo
Mitsui Financial Group - 0.9/4.8, Sumitomo Trust and Banking Co. - 0.7/1.0, DBS Group Holdings Limited -
0.2/1.1, Other European Banks - 7.4/2.2, Other Asian Banks - 5.5/7.8, Other US Banks - 2.9/1.9, Other
Canadian Banks - 1.8/0.0

Sources: Bloomberg – 20/9/08, Reuters – 10/9/08, Noor Islamic Bank PJSC

∞ USD 700 billion bailout, FDIC limit
increase to USD 250,000… whatever the
package, does it mark a bottom or just a
stop on the way down?
∞ Financial markets operating on a “who‟s next” basis
∞ Decoupling? What decoupling? US represents 25.4% of World GDP


It all started with housing

Source: Standard & Poors

∞ US housing market still taking hits though some areas seem to have
bottomed out (Dallas,…)
∞ Uptick in mortgage rates and tight underwriting criteria will dampen any
recovery

Confidence crisis

Source: Bloomberg, University of Michigan, Conference Board, National Federation of Independent Business Source: Bloomberg

∞ US domestic confidence at or close to lowest in past 20 years
∞ US CDS market, practically inexistent prior to 2007, now at 26 bps for 5
years and 28 bps for 10 years denoting deteriorating external confidence


Confidence crisis

Source: Bloomberg

∞ 10/03/2008: 288 bps, uncharted territory
∞ ``We will learn that this crisis has come to an end'' once the gap between the London
Interbank Offered Rate and the overnight index swap rate narrows to 50 basis points –
Alan Greenspan

Is there light at the end of the tunnel?

∞ From S&P/Case Schiller index high in 10/89, 8.3 years to recover (01/98)
∞ From University of Michigan confidence index high in 09/88, 8.3 years to recover
∞ From unemployment 03/89 low of 5%, 8.2 years to recover (05/97)
∞ Maximum level of unemployed: 06/90 -10.0 m (7.8%); 08/08: 9.5 m (6.1%)

Is there light at the end of the tunnel?

Indicators are
Source: US Bureau of Labor Statistics Source: US Census Bureau, Noor Islamic Bank PJSC

not positive…

Source: US Census Bureau Source: Bloomberg,

Meanwhile in the GCC: Credit crunch? What credit crunch???

Source: Central Bank of the UAE

Source: Central Bank of the UAE


Signs were there…

Source: Barclays Capital

∞ Until recently only visible in ever increasing spreads
∞ Liquidity in the UAE was supported interalia by speculation on AED
depegg


Credit crunch now officially here

∞ Regulators: September 2008: UAE Central Bank avails AED 50 billion
facility for banks operating in the UAE

∞ Interbank: One-month UAE interbank offered rate 4.51875% (06/10) up
from 2.0125% in June

∞ Corporates: “The availability and cost of credit are critical issues that impact
everyone. The Gulf region is not immune from the fallout of the sub-prime
crisis and the consequent global credit squeeze.” Robert Lee, Managing
Director, Investment Projects, Nakheel (Khaleej Times 28/09/08)

∞ News: Gulf News, 27/09/08:



Source: Bloomberg, Source: Bloomberg,

Source: Bloomberg, Source: Bloomberg,


Source: Bloomberg, Source: Bloomberg, Source: Bloomberg,

Drop from „07 close: ADSMI -25.4%, ADRE -46.5% Drop from „07 close: DFMGI -43.2%, DFREALTY -55.8% Drop from „07 close: SASEIDX -43.3%

Source: Bloomberg, Source: Bloomberg, Source: Bloomberg, Source: Bloomberg,

Drop from „07 close: DSM -15.0% Drop from „07 close: BHSEASI -13.5% Drop from „07 close: KGGIGEN -21.9% Drop from „07 close: MSM30 -21.0%


Which Markets?

∞ Value of planned and ongoing real estate and construction projects in GCC:
USD 1.3 trillion or 150% of 2007 GDP (MacKinsey)
∞ Saudi Arabia has internal needs and financial wherewithal to support
further development
∞ UAE developed rapidly, heavily focused on tourism and financial services;
AED 50 billion estimated financing requirements for 2009
∞ Qatar focusing on education and financial services

Which Markets?
∞ No market can stay immune from crisis
currently roiling the world as it reduces
access to financing and makes it more
expensive
∞ Sentiment has turned from unquestionably
bullish to more muted:
 Standard Chartered, July 24, ‟08,
Dubai – A tale of two housing markets
; “…long term outlook … is positive”
but “…signs of excessive short term
speculative activity … can prove to be
destabilizing”
 Morgan Stanley, August 4, ‟08, MENA
– Property Report: Preferred markets:
Abu Dhabi, Saudi Arabia, Qatar
 Samba Report on Dubai Real Estate, September „08: quot;Soaring property
price increases over the [past] five years, have attracted increasing
supply, which will eventually exceed demandquot;

Which Markets?
∞ Despite credit crunch, investors remain guardedly positive
 DIFC Investments launches AED 12 billion realty and infrastructure
fund to focus on Dubai and UAE
∞ GCC markets and sub-markets at different levels of development though
currently enjoying high levels of occupancy across all product types
∞ Generally, focus has been on high-end where oversupply could start
creeping in
∞ Developments catering to the mid to low end have been “few and far
between”


Which Markets?
Location, Location, Location

∞ Even in the best markets, it‟s back
to basics:
 Location
 Financial wherewithal of the
sponsors
 Appropriateness of the product
 Quality of the stakeholders
(contractors, tenants /
operators,…)


What a difference 12 months make…

∞ All in cost to party seeking financing has shot up
∞ Tenors have come in
∞ Valid for both Islamic and conventional financing
∞ Club deals



HSBC/ DIFX Sukuk US Dollar Bond Index (SKBI)

SKBI: Spread SKBI: Duration

(Last data point: September 5, 2008) (Last data point: September 5, 2008)



HSBC/DIFX Middle Eastern Conventional US Dollar Bond Index (MEBI)

MEBI: Total Return MEBI: Duration

(Last data point: September 5, 2008) (Last data point: September 5, 2008)



Credit has become a scarce and expensive
commodity



∞ Focus, do not overextend
∞ Development financing will be difficult, in particular for spec projects: Pre-
lease, pre-sell, sign up anchor tenants
∞ Operating properties financing will be more challenging than in the past and
conditioned on cash flow coverages with much less importance given to
loan-to-value criteria
∞ Expect higher LTVs Equity will be a bigger piece of the puzzle
∞ Quality of third party appraisals will need to improve substantially
∞ If banks are interested in your project, don‟t waste time: in this market a
tougher financing agreement is better than no financing at all
∞ There is no cheap money out there any more


… as a result, a number of projects will not meet investors
return criteria and/or may not attract financing

∞ The good news is…if you have time… easy credit will eventually be back


Where has all the Liquidity Gone?

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