LEHMAN CHRONICLES: Duncan Owen, global head of real estate at Schroders and former chief executive of Invista Real Estate, talks about the warnings that were ignored and the areas most vulnerable to another slump.
Looking back
Did you sense there was a crash coming?
Yes and no. I had a very good chairman at the time [the late Alastair Ross Goobey] who highlighted the special risk of a banking-led crisis and how this could be deeper than other recessions. He was giving all sorts of gypsy’s warnings but no-one could believe it was as bad as he said it could be.
What are your abiding memories of the time around the collapse of Lehman itself?
By the time Lehman happened the damage was already done. The real estate market really “cracked” in August 2007 so while Lehman was bad news we had already experienced negative symptoms. There was an overriding sense of genuine fear that there would be a run on the banks and with Lehman it is sometimes easy to forget that Northern Rock came before.
How has it shaped things for you since?
It has made me more cautious, especially in relation to leverage. At Invista we focused on protecting income and investment performance driven through fundamentals, which remained very strong through the cycle. However, experiencing how the negative sentiment affected all aspects of the market has made us underwrite and review risk differently. For example, understanding that risk frameworks, assuming what happens if one or two thing go wrong, are less useful because when a number of economic factors are negative, it can affect everything.
If occupiers cannot afford to occupy real estate, it illustrates a fundamental weakness
Looking forward
What do you think is the likelihood of another crash in the short to medium term, and why?
A genuine widespread crash is low risk at the moment because of low leverage. However, a correction is likely in my view as quantitative easing slows and economies slow, especially with the risks of trade wars.
What things should investors look out for that might signal another crash?
Leverage being too high is a very important indicator, which increases risk. However, the most important fundamental and lead indicator is if occupiers are struggling. This is where the enduring value really lies and if occupiers cannot afford to occupy real estate, it illustrates a fundamental weakness.
What sector or geography do you think looks most susceptible to a downturn?
Retail is the most acutely affected sector at the moment. This is across most geographies but there will be “winning cities” that will perform better, rather than regional differences. Ultimately a correction will lead to polarisation of performance between “winners and losers” in many parts of the market.
