Entering the bear pit: investing in tumultuous times
How does the current market volatility translate to actual deal activity?
It was September 1990. Very fresh-faced and inevitably naive, David Ereira and I set up Ereira Mendoza. We were just the other side of the 1989 “crash”, but the tail was longer and tougher than envisaged.
Of course, all markets endure volatility. But occasionally circumstances and trends collide to create material structural market corrections and, in my opinion, we’ve now entered the third such occasion in my career, following seismic shifts in 1989 and 2008.
I don’t have the economic intellect or even thankfully enough word count in this piece to summarise the dynamics that led to 1989 and 2008; suffice to say, this time around there are fundamental differences.
Back in 2008 what we, or more pertinently the banks, discovered, was the folly of high leverage – the government had to step in to prevent some banks from blowing up. And the market took heed, resulting in banks with far stronger balance sheets and investors with much lower LTVs. All was rosy in the garden as what followed was a nigh-on 15-year bull run feasting on virtually zero interest rates, washed down by glugs of QE.
Taking a nosedive
So, what happened?
Take your pick: Brexit, Covid, Ukraine, Kwasi, inflation, interest rates, or maybe just a natural reckoning after 15 good years. The degree of instrumentality each of these catalysts have had in shaping our nosedive into a bear market is anyone’s speculation. And I suspect we are still a good 12 to 18 months away from knowing how these factors will impact occupational demand and true rental values.
But the one thing we’ve known for sure and which will be the biggest single factor at the core of this bear market is increasing borrowing costs. Logic told us interest rates only had one way to go but the human psyche is such that we become acclimatised pretty quickly to prevailing market conditions. And albeit we knew interest rates could only increase, who had the foresight to hedge or swap their interest rate for long enough? I hope that doesn’t sound sanctimonious – indeed, the flipside is if you’d waited for greater value or built a buffer into your borrowing costs, you wouldn’t have been competitive and bought much through the bull run. Such are markets!
Opinions I’ve encountered as to the extent of the bear we are entering vary from “sensible pricing correction” to “Armageddon”. This probably more accurately reflects the desire of that capital and their own position or even positioning. The reality of it is none of us know how this plays out with both the opportunities and challenges that lay within. But how does all this all translate to actual deal activity and what’s that going to look like?
No question volumes will be materially down and valuers flailing. If you’re a buyer, you’ve been waiting for this market for quite a while but wondering when or if it would ever arrive. And to boot, if you’re a dollar-denominated investor, there’s an added frisson of excitement. You are already seeing meaningfully lower capital values but likely agonising between the two cliches of “not wanting to catch a falling knife” while also knowing you “can never call the bottom” – which embody the emotive dichotomies of investing, fear and greed.
And if you are a seller or think you may want to sell, what to do? Sit tight and ride it out until, or if, the market improves, or bite the bullet now before the market or other factors weaken your hand. For sure we are facing a shift in values and we have witnessed discounts of 10%-25% on trades executed in the last few weeks.
Wherever you sit on the sell or buy spectrum, however, times like these require a different weighting of skill sets from an agency perspective. Key to this are relationships with deep pools of private capital, discretion and trust. The bottom line in a volatile market is that neither counter-party in a negotiation knows what the following days may bring, and if that might affect their position. So it is within this context that a lot of conversations will be taking place and those discussions “held” by your agent.
Emotional intelligence
The ability to look into the whites of someone’s eyes and know you can trust what’s been agreed with both parties’ ability to deliver is critical. This requires buckets of emotional intelligence, empathy and complete sanctity of the information being explored in those conversations, especially if either of the parties’ thinking or actions might impact on public markets.
No question this is not a market for the faint-hearted. There is unfortunately a lot of pain and distress coming down the tracks as the market reacclimatises and I take no pleasure in that. But we, as all agents, are here to advise, support and chew over market dynamics with clients, whatever their position. And there will be opportunities.
And while this is our market and livelihoods, I say all the above mindful of and relative to a broader socio and economic perspective. Without doubt, we are living in turbulent, socially divisive and uncharted times, and as I have articulated previously, responsible capitalism is about reducing, not increasing the gap between the have and the have nots, and not just simply financially.
And if this doesn’t resonate on compassionate grounds, let pragmatism point out that unless society addresses these imbalances, we will likely experience the deterioration of the very fabric of society on which we all ply our trade, and benefit from.