Aug 25, 2008

Investment banks’ curtailing of real estate funding has negatively affected many economies, from the United States to Asia. Will there be any relief soon? CPN associate editor Amanda Marsh spoke to Steve Collins, managing director of Jones Lang LaSalle Inc.’s international capital group, to gain insight on which direction financing is taking and what to expect in the near future.

CPN: When did global investment banks start cutting back on real estate real estate financing? Did they have any other reasons besides reducing their global risk?

Collins: While the investment banks started cutting back at the first of the year, they were still raising funds to buy the distressed and surplus asset base. The financing cut-backs came when they realized it would be more than a short-lived plunge. They’ve now realized a lot of their aggressive investments are under water, and the damage is amplified given they were involved in every level of the capital stack, be it equity, mezz, B-notes or bridge loans. They were doing so much financing, it became a burden and they’re now unloading principally to clean up their balance sheets.

The difference between traditional banks, which are much slower to face troubled water given regulatory and shareholder concerns, and the I-banks, is that when the investment banks see a problem, they get right to it and slash the junk off their books. They’re taking their medicine now to start the next fiscal year right.

CPN: What countries have been most affected by this cut back, and how?

Collins: The U.S. is affected as it has polarized the country. We were on the way out but the investment bank stalls forced people to stop and question what will happen to all those assets and portfolios. Now, many are waiting for next year to transact.

Europe feels it too, but the greatest impact will hit the emerging markets like India, Vietnam and the Southeast Asia economies. The investment banks were the first and only lending their on the higher risk opportunities because of the high returns. Some have pulled the plug on those emerging markets, at least for now, and that will have decided effect on those economies.

CPN: Can these countries expect to see some relief soon?

Collins: Yes. At the same time the I-banks are getting rid of debt, they’re also raising new funds to buy the same assets under different fundamentals. This crisis and turmoil in the market will clear and there will be those who will get a good deal in today’s market. I expect the investment banks will raise more funds after the first of the year.

CPN: Can we look back to past cycles on how this one may pan out?

You can compare it to the savings & loan crisis in the late 1980s-early 1990s, given there was little active lending. But the wartime funding and defense cycle helped buoy the economy then. Now, we’re looking to the government to back Fannie and Freddie and the create stimuli to pull us out. It is likely Wall Street will invent another vehicle people can use to borrow money. They’re smart people and there is definitely a market for lending products.

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