THE LEHMAN CHRONICLES: Richard Dakin, managing director, CBRE Capital Advisors, remembers the fallout from the crisis and how London managed to recover.
Looking back
Did you sense there was a crash coming?
It would be fair to say that most people thought we were going through unprecedented times.
I was head of major corporates at Lloyds Bank, so I had the benefit of meeting a number of large multinational corporates during that time – they had mostly started to reduce stock levels to reflect a sharp drop in demand and overall investment was being curtailed, as cash generation became the most important driver.
The pace of this change in the markets was exacerbated by the high levels of corporate gearing, particularly in some parts of the real estate industry. You could tell then that the global economies were going to experience a significant fall, but I don’t think many people were anticipating a “crash”.
What are your abiding memories of the time around the collapse of Lehman itself?
For me, Lehman’s compounded an already fragile financial market and it was the fear factor of what was next – contagion risks to the rest of the sector became a real possibility.
The importance of up-to-date information via the news channels became significant and increasingly vital, as were our face to face meetings with clients to hear their thoughts first-hand.
Events were moving fast and in the financial services sector in particular rumours led to heightened risk. I think most people forget the “credit crunch” happened a year earlier with the first run on a British bank for over 100 years – Northern Rock – in September 2007. The property market by that stage was well into a downturn.
How has it shaped things for you since?
I experienced the fall-out first hand in the following years, both working within Lloyds Bank which faced its own issues, and for our diverse range of clients.
Contagion risks to the rest of the sector became a real possibility
For me, it re-emphasised the importance of getting the basics right – a strong focus on a sustainable strategy, having a management team with a balance of industry experience, cash generation and prudent risk management providing the company flexibility for a number of scenarios.
Having access to market leading data and a reliable group of advisors is also vital as market changes happen fast, not just to manage any issues but to take advantage of the opportunities that emerge. The period following Lehman’s again showed that PE groups move quickly and have the ability to deploy significant cash to these type of opportunities “when the time is right”.
Looking forward
What do you think is the likelihood of another crash in the short to medium term (and why)?
There is little to indicate another crash is imminent. Gearing levels have risen over the past couple of years but nothing like to the extent experienced pre Lehman’s.
Economies generally are in better shape globally and while quantitive easing may have increased the high levels of liquidity chasing the opportunities (which has resulted in a sharp rise in asset values), we are in a better place to manage any downturn and the associated risks.
In the UK, CBRE is forecasting yields to increase over the next couple of years as the risk free rate rises, before a return to compression in 2021 and 2022 but this is not a crash, just a price correction.
What things should investors look out for that might signal another crash?
In Europe, I am still surprised at the level of non-performing loans held by the banks. While some countries such as the UK have largely dealt with these situations, a significant volume still exists which requires action over the next few years to free up bank liquidity and assist the underlying real estate market.
If you’re thinking about a major downturn then you’re probably going to see the same decline as everyone no matter what sector you’re in.
Full employment in the US is also another warning sign, along with a policy error. If this happens, interest rates could rise too quickly, causing a US slowdown which would likely echo round the rest of the world.
What sector or geography do you think looks most susceptible to a downturn?
In major downturn events (like that of 2007) everything falls together. The difference comes in the recovery phase. In the recovery from the GFC, London came back first.
This was because of international investor demand founded on a fairly robust supply/demand balance – there had been only limited speculative construction in London offices compared to other sectors of the market (retail, provincial offices etc).
In the early 1990s, in contrast, London took longest to recover – because of the huge wave of speculative development that had preceded the crash.
Therefore, if you’re thinking about a major downturn then you’re probably going to see the same decline as everyone no matter what sector you’re in. But you can get a swifter recovery by being in those sectors (and local markets) with the tightest supply and most resilient occupier demand.
