THE LEHMAN CHRONICLES: Second in our series of key industry players’ recollections, Pat Gunne, chief executive of Green REIT, discusses the cyclical nature of the market and why he thinks another downturn is likely.
Looking back
Did you sense there was a crash coming?
In a nutshell no, as the issue was less about the cycle, and more about the extent of the value destruction, which is well documented as a “one in 100 year event”. Although looking back there were certainly clear indications that we were at, or close to, a cyclical high given the negative yield spread versus longer term risk free rates, which was the canary in the coalmine indicator.
Hindsight is a great thing, it was August 2007 before I understood the US off-balance sheet funding model, or indeed the extent of the securitisation going on across the entire debt markets, but more particularly the sub-prime element and the misjudgement of the rating agencies.
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What are your abiding memories of the time around the collapse of Lehman itself?
Eerie. It was almost a year after the cracks appeared, so in some ways it was a surprise that it had taken so long to reach Wall Street, and yet when it played out over that fateful weekend it was almost incomprehensible. I remember thinking that this was the failure of the capitalist system itself, and looking forward all bets were off in terms of the ramifications for society and how markets operate.
Clearly it was a time of great opportunity despite personal and corporate balance sheets taking a whacking.
How has it shaped things for you since?
Clearly it was a time of great opportunity despite personal and corporate balance sheets taking a whacking. We started a new business, Green Property Ventures, which at its peak was operating jvs with banks and private equity to the tune of about €2.5bn of assets across the UK and Ireland.
Understanding the timing around getting back into the capital side was also crucial to us, as liquidity had evaporated due to the buy/sell spread and cost of capital/absence of debt. And the market was about to start trading again off very different value levels. We launched Green REIT in June 2013, which – with the benefit of hindsight – was great timing.
Looking forward
What do you think is the likelihood of another crash in the short to medium term (and why)?
We are at the advanced stages of the cycle in most developed markets with rents at (or close to) cyclical highs, and yield at (or close to) cyclical lows. On the other hand, there is a very positive yield spread relative to the risk-free rate which is supporting values.
Of course, we will hit another downturn, as it’s a cyclical game. The issue is figuring out when as opposed to why, and that’s a debate which is well beyond the remit of this response.
What things should investors look out for that might signal another crash?
Yield spread; over exuberance; risk return being misjudged; over-lending or over-development; tech bubble; geopolitical turmoil. The list goes on.
What sector or geography do you think looks most susceptible to a downturn?
I haven’t a clue – in cycle peaks and troughs, correlation across markets and sectors tends to be quite high.
