THE trouble for property stocks, arising out of the crisis in the US subprime market which was unearthed earlier this year, seems to be far from over.

The latest quarterly global property & REIT report from Standard & Poor’s (S&P) indicated that the seven-year bull run in the global property and REIT (real estate investment trusts) stocks finally stalled in the second quarter of calendar 2007. This was partly due to the fallout from the US subprime mortgage market.

After recording a steady rise for seven consecutive years, the global property and REIT stocks started slipping. The S&P report stated that the losses have been the highest in Europe. The US was a close second, propelled by the fall-out from the subprime mortgage market.

REITs took a bigger hit as the S&P-Citigroup Global REIT index dipped 6.6%. The global property index dipped 4.5% in the second quarter of 2007, while the S&P-Citigroup BMI Global Index rose 7.4% during the same period. According to S&P's analysis, a prolonged seven-year stretch of continuous gains, leading to excessive valuations, low yields and legitimate desire for profit-taking, caused a sell-off for this sector.

The emerging market property stocks, however, were the exception as the S&P-Citigroup emerging market property index gained 19.4% during the period. Property stocks from Chile, China, Egypt, Indonesia, Malaysia and Thailand had large double-digit gains to sustain the growth of emerging market property companies, even though REITs from South Africa and Turkey followed the general global REIT trend and showed negative returns.

In India, however, property stocks still form a minuscule part of listed stocks. REITs are still at a conceptual stage with the government yet to frame the norms for the product. High leverage, which provided much of the impetus for the large property company deals in the last few years, has lost its sheen, given the cracks in the subprime mortgage market and its attendant securitisation market.

Tougher loan standards and the retreat by large investment banks from the subprime market have put a brake on the hyper-aggressive deals. There is no immediate link between the commercial mortgage-backed securities (CMBS) market and the property market. However, the problems faced by the CMBS market, coupled with the ratings agencies’ tougher ratings standards on bonds backed by commercial mortgages, have put a brake on the liberal financing. The total size of property deals in the US dropped dramatically in the second quarter to $6 billion, from over $29 billion in the first quarter.


Economic Times-02/08/07
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