An anti-austerity government in Athens putting the threat of a Greek EU exit back in play. Plunging crude prices fuelling GDP downgrades in oil–producing nations. Suddenly the consequences of the wholly unexpected revaluation of the Swiss franc on 15 January do not seem so serious.
So far at least, there have been no real estate casualties in the London property market following the surge in the Swiss franc, calculated at one point at 39% against the US dollar and the euro – unprecedented in developed world currency markets in modern times.
And given that it was movement in the Swiss franc that forced London landmark the Gherkin into receivership as recently as last April, perhaps we shouldn’t be surprised.
Gherkin in a pickle
That receivership was a long time coming. IVG and Evans Randall had bought the building in 2006 for £630m, using a £396m loan from a five-bank consortium. However, IVG’s unhedged share of the loan was denominated in Swiss francs.
Principal tenant Swiss RE paid its rent in that currency. But with total debt secured against the building rising to £509m – an LTV of 96% – the landlord found itself in breach of its covenant. The senior lenders “had no choice” but to call time on their loans, according to administrators.
Today the message from London to Zurich is “don’t panic”. James Gann, who runs Colliers International’s investment team in the City of London, firmly quashes any notion that the market might be in for a rerun of the Gherkin episode, which culminated in its sale to Brazilian banking billionaire Joseph Safra in November.
“Borrowers might be arranging underlying finance elsewhere, but I am certainly not aware of a lot of Swiss franc borrowing to buy in London,” he says. “When people are investing in property they tend to want to make it as low-risk as possible and borrowing in the currency of the market in which you are investing makes sense, though everything depends on the individual investor’s attitude to, and appetite for, risk.”
The real problems lie in the retail market, particularly in certain eastern European countries. Thousands of home owners in Hungary, Poland and Croatia have borrowed in Swiss francs to finance property purchases in locations outside Switzerland. They must surely now appreciate the folly of -borrowing unhedged in a -currency that has traditionally been so strong.
Lessons for bankers
But there are lessons here for bankers too. Traditionally, one of the first lessons of international banking is to disabuse prospective borrowers in low-interest-rate currencies such as the Swiss franc of any notion that this would be a good idea.
Anyone who bought the Swiss franc in June 1974 when one pound bought more than seven francs, and is still buying them today when the same sum buys less than 1.3 francs, is intimately aware that one of the safest of safe haven currencies marches in only one direction over the long term – relentlessly upwards.
The short-term gains to be derived from paying a lower interest rate are almost certain to be eroded, if not obliterated, by long-term depreciation against the Swiss franc. That will happen even more quickly in an era of prolonged ultra-low rates; the benefits from the franc’s lower-cost borrowings will have been significantly less for recent Polish borrowings, for example, than for their Hungarian counterparts -borrowing in the early to mid-2000s.
One cannot help but wonder if that lesson has been scratched from the novice banker’s workshop manual in central and eastern Europe.
“The impact on the loans that have been taken out on Swiss francs is very obvious and has been a risk those borrowers have taken,” says David Schoch, global corporate director
at CBRE Switzerland. “On the other hand, they have profited from very low interest rates.”
Markus Allenspach, head of fixed-income research at bank Julius Baer in Zurich, adds a further note of caution. “The Swiss franc is a very dangerous animal,” he says.
Private borrowers in parts of Europe are finding that out to their cost today. But before any corporate borrower gets complacent, they should remember that the seeds of the Gherkin’s administration were sown by Swiss franc borrowing less than a decade ago.
