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The Global Financial Crisis and International Property Performance

Working paper #661
Jacques N. Gordon

Commercial real estate did not cause the global financial crisis, but is caught up in the same vicious cycle of value destruction as virtually every other asset class. Securitized real estate has already gone through several rounds of re-pricing; private equity real estate will also experience significant but more drawn-out re-pricing. Although price discovery, re-pricing, and eventual recovery differ by country, the global crisis also reveals some surprising similarities across markets. These are worth understanding, since debt and equity now move with relative ease across political borders. Academic research shows that during a financial crisis all asset classes become highly correlated, and the risk-reducing power of diversification is temporarily lost. But research also shows that banking crises have happened repeatedly and don’t last forever. In 2009, real estate investors must rely on rational analysis to guide their investment decisions. This advice is especially relevant (and difficult to execute) when markets are in turmoil. “Keep your head, when those around you are losing theirs,” wrote Rudyard Kipling. In the years ahead, many real estate investors will be losing their heads: expect to see assets fall into the hands of financial institutions that are unprepared to operate them effectively over the long haul. And expect panic selling by those who need to raise liquidity in a hurry. Countries like Australia, Korea, and Germany are likely to move through the re-pricing process faster than the United States. While the price correction process is painful, it is also a necessary pre-condition to a capital market recovery by laying the foundation for stronger performance in the years ahead.

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