It is crystal ball time for the luxury real estate industry, and for once, the industry seems to be in agreement. A few optimistic Florida realtors aside, the consensus is there is only one way to go in 2009. More of the same and downward prices. The real question is whether we will see bottom and if so when. I have long been of the opinion that the only way to restart the market is realistic pricing, but I feel we have a ways to go just yet. I don’t think any one is still hanging on to the dis-proven notion that the luxury real estate market is completely insulated from the rest of the market, and the underlying fundamentals are affecting the entire market.
A look back at 2008
A look at the closing months of 2008 will give a good indicator of what we are facing early 2009.
Bentley are feeling the pinch
The stock market shrugged and said “Meh,” to the US government’s $17.4 billion auto industry bailout, well aware that this is just 3 months breathing space, and the future of the big three automakers is still very much in doubt. The phrase, “You can lead a horse to water, but you can’t make him drink,” comes to mind. Whatever short-term measures may be taken to support GM, Ford and Chrysler, no one expects automobile sales to increase any time soon. Toyota warned of their first trading loss in history in 2008, so the chances of a turn around for the American makers seems unlikely. Although Toyota were quick to point out that they were still committed to Formula One racing, a gentle dig at Honda’s withdrawal from F1 earlier this year. In the meantime, Honda announced they would be closing their manufacturing plant in Swindon, in the UK for two months, laying off 4800 staff for the duration.
Tata Motors, the Indian owner of Jaguar Land Rover has seen their share value fall 74% as sales of luxury automobiles dried up around the world, and may be rueing the day they picked up the marques at the bargain price of $2.3 billion from Ford earlier in the year. Rumors are that a £1 billion injection of cash is needed to keep the company afloat. The British government is playing hard to get as far as a bailout, but I have a feeling Jaguar will be back in British hands before the year is out when the government is eventually forced to provide funds. Jaguar and Land Rover have a long history of not being able to make a profit, and the bottomless pit that is the company’s accounting department will more than likely prove beyond even the Tata family pocketbook.
You have to give Ford credit for dumping their high-end marques at just the right time, and another luxury car maker, Aston Martin has announced they are axing 600 jobs in 2009 to reduce costs. This news comes five minutes after they announced the most expensive car in the world, the Aston Martin one-77. Bentley, Mercedes, BMW and Porsche are also feeling the pinch – all reducing outputs and shedding staff in 2009.
Louis Vuitton Store Canceled
Louis Vuitton canceled their flagship store in Tokyo (looking at the architect’s plans, all I can say is thank goodness) and the luxury goods market saw the biggest fall in retail sales of all sectors, in the United States, falling almost 35% year on year. “There has been a major contraction in consumer spending,” said Michael McNamara, vice president of research and analysis for MasterCard Advisors. Chanel canceled their traveling art exhibition in London Paris and Moscow, Switzerland’s Richemont, owner of Cartier and Montblanc, and France’s LVMH, which owns Louis Vuitton and Gucci, have both lost 40% of their share value
With sales of luxury goods collapsing in the United Kingdom, high-end retailers held “secret sales,” in the run-up to Christmas because they were “too embarrassed” to have “Sale” signs in their windows. Stores including Liberty, Net-A-Porter and Richard James offered discounts of up to 60% and invited customers to special events and private “sale” websites to offer goods at reduced prices. All to no avail – sales were lackluster, with experts suggesting that there are more than 300 retailers on the critical list in Britain, with a more than 70% chance of failing in 2009.
If the luxury automobile and luxury retail industries are facing a crisis, I am not sure which word adequately describes the financial services sector. Luxury property prices the world over are closely connected to the fortunes of the financial services industry, and the financial services industry is not looking healthy – or trustworthy. Previous to 2008, as much as 20% of Britain’s GDP came from the City of London’s whizz kids juggling money. That came to an abrupt halt this year, as the world came to realize it was all castles in the sky. Ten year’s “profits” wiped out on a few short months have seen luxury property prices in London fall as much as 20% in one quarter. It seems fairly pointless covering the American bank bailouts, as these have been covered ad nausem already, but banks all over the world are reporting record loses and falls in share value. As an indicator, this is a list of European banks and the fall in share values seen end-2008, in no particular order.
Barclays, UK -70%- HSBC Holdings, UK -27%
- Banco Santander, Spain -52%
- Unicredit, Italy -70%
- BNP Paribais -60%
- Intesa SaoPaolo, Italy -60%
- Royal Bank of Scotland, UK -89%
- Credit Suisse, Switzerland -59%
- UBS, Switzerland -71%
- Deutsche Bank, Germany -72%
- Credit Agricole, France -63%
- Societe Generale, France -63%
- Lloyds TSB, UK -74%
- HBOS, UK -91%
- Standard Chartered, UK -53%
- Nordea, Sweden -49%
- Commerzbank, Germany -77%
So, as much as the European and British governments seem intent on blaming the crisis solely on American sub-prime loans, this is a global issue. Many of these banks have needed an injection of capital, and much of this has come from their respective governments. Those that raised capital through non-governmental channels invariable went to Middle-eastern oil producing nations for the necessary capital. Barclays raised £7 billion from Saudi and Qatar recently. Embarassingly, Barclays is at the same time being sued by Sheikh Abdul Aziz al-Thani, another member of the Qatari royal family over an alleged E50 million fraud in their Spanish offices. Credit Suisse also went to Qatar for funds. In 2008, Royal Bank of Scotland had to be bailed out to the tune of £20 billion, along with Llyds TSB and HBOS for another £17 billion. One unfortunate side effect of the source of these funds is it becomes impossible to trust the predictions and data issued from these banks. The worlds banks are now either owned by the government they reside in, or another government with a vested interest. When Barclays and Credit Suisse’ fortunes rely almost entirely on the auspices of the Qatari and Saudi Royal families, how can one take their recommendations in the future seriously?
Back in 2007, Abu Dhabi took a 4.9% stake in Citigroup, becoming one of Citi’s largest shareholders after Saudi billionaire Prince Alwaleed bin Talal and Capital Group Cos. Which brings into doubt Citi’s decision in December to pump $8 billion of funds into Dubai for government infrastructure works shortly after being the recipient of $20 billion of US taxpayers money and a government guarantee of $300 billion in toxic assets. Capital Group Cos recently had a lawsuit dismissed against them for illegally paying kickbacks to brokers selling mutual funds, although there is an appeal pending. Now that the luxury property market in Spain has all but collapsed, the main question is where will the world’s criminals go to launder their ill-gotten gains. Maybe Dubai will survive after all?
The Bernie Madoff scandal has already claimed it’s first physical casualty. French investment manager, Thierry de la Villehuchet, who lost more than a billion dollars in the scam, was found dead in his Manhattan office this week, with pills around him and his arm slit with a box cutter in what appears to be suicide.
2009 outlook
A woman protests outside Swiss Bank UBS in Zurich
Things are changing in the financial services industry. Until the finance sector gets it’s act together, and there is some accountability, the luxury real estate market is going to continue to face issues and continue to fall in value. The Madoff scandal is the tip of the iceberg. My feeling is that there will be many more of these coming to light in 2009, because it is far harder to hide these sort of dealings in a down economy. All the time the next investors money can be used to pay off the first one, they can stay hidden. Pressure is mounting to bring some accountability to the financial markets, although the scams are so intertwined with government as to be all but impossible to unravel. The entire world economy seems to have been one enormous Ponzi scheme. Twenty years of deregulation is coming to a head, and there are already protests around the world at the level of bailouts being given to the banking system, and questions are being asked.
This month, The Associated Press contacted 21 banks in the US that all recieved at least $1 billion in US government funds and asked four questions: How much has been spent? What was it spent on? How much is being held in savings, and what’s the plan for the rest? Not one bank was prepared to answer the questions, saying either that they cannot track where the money went, or flatly refusing to discuss it.
The British government has already gone broke buying up banking stocks, and the deputy governor of the Bank of England admitted that the British banking system had almost collapsed as he called for tighter lending regulations. The pound is now almost at parity with the Euro, and many agree that the £50 billion already injected simply was not enough. The British Prime Minister, Gordon Brown is apparently angry at the banks. “I’m angry, angry we had a banking system where people neither knew the risks they were taking or were open enough about the problems they had,” he said, and then went on to reiterate his intentions to keep pumping money into them. There were protests in London outside an RBS building over Christmas over bonuses paid to RBS executives. I would expect luxury property in London to continue to devalue in 2009, perhaps even more dramatically than already seen.
Elsewhere in the world, the public are making their feelings plain. Protests in Russia against used car import taxes resulted in at least 100 arrests. Riot police broke up the second protest that week in Vladivostock, and another incident in Moscow outside a Russian bank, where depositors demanded a return of funds is reminiscent of the 1998 rouble collapse. Russia has been particularly hard hit by the economic downturn, and Moscow police say they are preparing “to help contain social unrest when the financial crisis spreads through all strata of society.” This level of discontent will only increase in 2009, and luxury property prices in Russia are set to plummet over the next year.
The knock-on effect will be felt around the world. Russian billionaires have been helping to push up prices in London, Manhattan, the Cote D’Azur in France, and the Italian Riviera, amongst other “hot spots.” With this pool of potential buyers suddenly drying up, the effect can only be one of downward prices. Many major building developments in Russia have already been dropped, and it is highly unlikely they will be picked back up again in 2009.
Protests in Iceland continue, where the unemployment level is continuing to rise, and the Icelandic government is facing an impossible situation. And even in Switzerland, land of the banker, protesters have been demonstrating against the government bailout of UBS.
New York has yet to feel the full pain of the financial sector shakeup, but 2009 will change that. The financial sector eliminated 2,400 jobs in December, but that figure will increase dramatically in 2009. Bonuses are expected to be less than 50%, which is actually surprising given the groundswell of public opinion. The face of luxury real estate will change in New York, with developers already leaning toward rentals instead of sales. The developer of the Atlantic Yards project, Forest City Ratner, has stated it would shift focus away from expensive luxury condominiums in favor of rental apartments during the first phase of construction. Personally, I think this is wishful thinking, and I don’t see the project getting off the ground any time soon. Frank Gehry has already axed almost all the employees working on the project after Ratner refused to pay for alterations to the plan. The original loan of $153 million has now crept up to $177 million and is due in February – talks are under way to extend the loan.
I have a feeling we are going to discover that the amount of money already commited to the financial sector in the US, the UK, and Europe is just not enough to keep the ball floating. Citi and AIG will be back to congress for more funding; the British government will have to fully nationalize Lloyds TSB, HBOS, the Royal Bank of Scotland and a number of other banks. Russia’s Oligarchs are going to end up as state employees; and we are going to see a new definition of “luxury,” in the future. What that will be remains to be seen, but I also have a feeling that the word “bank,” will become the new four-letter-word.
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