Game over

Global real estate markets are collapsing. From Manhattan to Malaga, house prices are falling and investors are fleeing the sector as the era of easy credit comes to a dramatic end.

The American Citigroup executive finished his speech with a warning that went largely unnoticed by the delegates of an otherwise uneventful real estate conference at one of Dubai's lesser known hotels.
He was talking about "subprime" - a word that hadn't then entered the popular English language - at least not outside America. It was April 12, 2007. What he went on to say was prophetic.

"Subprime," he said, would become a "bigger problem than people think, and may even filter throughout the world."

Stephen Coyle, then the chief investment strategist of Citigroup's property unit, would not have known that his prediction would have such personal ramifications. Within the year, Citigroup had become one of the first big casualties of subprime. On April 19, 2008, it posted a first-quarter loss of $5.1bn and cut 9000 jobs - including those of Coyle and his property team.

"I could see what was going to happen. It was plain even then. The stupidity turned into greater stupidity which turned into absurdity," says Coyle, now a fund manager at New York-based Cohen & Steers.

"We had a lot of people that got into this industry that really should never have been in it."

Around the world, the credit markets that sustained a decade of building, are crumbling. Banks worldwide are re-pricing the cost of risk, and in a sputtering global economy, property owners are factoring in lower rental income for years to come. Last week, the world got an inkling of the real cost of the last decade's property boom in the US.

The Bush administration has proposed to buy up to $700bn of bad debt in a bid to tackle the credit crisis crippling the economy, raising America's debt ceiling to $11.32 trillion. The US housing bubble that triggered a worldwide economic slowdown began in the wake of the dot com crash in 2001. Investors, wary of volatile equity markets, turned to property and kept buying amid record low interest rates.

As housing prices took off, so did the lending to subprime borrowers, many of whom would have been denied credit two decades ago. On TV, an ever-growing number of property shows compounded the belief that house prices never fall. Home makeover TV shows appeared on networks globally and a generation of buy-to-let investors started acquiring second and third homes in emerging property hot spots such as Dubai, Prague and the booming cities of new Europe.

In the US, the subprime timebomb continued to tick. Regulatory changes in the 1980s facilitated the growth in subprime lending but it wasn't until the mid-90s that the phenomenon began to gain traction. By 2007, the subprime industry was in meltdown, with adjustable rate mortgages (ARMs) to subprime lenders representing 43 percent of the foreclosures started in the third quarter of the year.

Through mortgage-backed securities (MBS) and collateralised debt obligations (CDO), bad debt had been passed on to some of the best-known names on Wall Street and in the City of London, including investment banks Bear Sterns and Lehman Brothers. The ensuing credit squeeze has had a devastating impact on both residential and commercial property markets such as the City of London, which attracted buyers from around the world.

Easy access to lending encouraged investors to acquire buildings with long leases and guaranteed rents. It was a no-brainer. The difference between the cost of lending and the guaranteed rental yield provided the profit to make the deal bankable.

But the real returns were generated by the massive increases in the price of the buildings, such as the Shell-Mex House in Central London, bought by property tycoons, the Tchenguiz and Reuben Brothers in 2003 for about $608m, and sold less than four years later for $1.69bn.

The easy money attracted an eclectic mix of buyers. Sheikhs from the Gulf bid against pension funds, property companies and even syndicates formed by accountants working in small towns across Ireland - who at one point became the largest investor group on London's Bond Street.

The bidding up of commercial property continued on both sides of the Atlantic, pushing prices higher and higher and squeezing yields to as low as 4 percent in London's prime office markets.

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