A New Financial Crisis?

A New Financial Crisis?

Last week brought another bank failure In the United States, this time it’s?First Republic Bank's turn, the third major casualty of the biggest crisis to hit the U.S. banking sector since 2008.?

The banking turmoil erupted from the closure of Silicon Valley Bank and Signature Bank in March, causing depositors to flee regional lenders and fuelling fears that the crisis could engulf other midsized banks right across the US and further afield.

Closer to home, and maybe a little too close for comfort, Credit Suisse was rescued from near-bankruptcy a number of weeks ago, by local rival UBS in a takeover hastily brokered by the Swiss government, sending shockwaves throughout Switzerland and global financial markets.?

For more than a century and a half, Credit Suisse stood as a symbol of Swiss financial power, stability and prestige.??It’s quite something that a bank that has been trading for some 167 years, was gone in little over 72 hours.?

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Charlie Munger, Warren Buffet’s buddy, only last week, warned of a brewing storm in the US commercial property market, with American banks “full of” what he said were “bad loans” as property prices fall.?

The comments from the 99-year-old investor come as turmoil continues to ripple through US financial system, which is reckoning with a potential commercial property crash, following a handful of bank failures as set out above.?

“It’s not nearly as bad as it was in 2008,” the Berkshire Hathaway vice-chair told the Financial Times in an interview earlier this week. “But trouble happens to banking just like trouble happens everywhere else. In the good times you get into bad habits . . . When bad times come they lose too much.”

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What is really going on, and how will this?impact your business?

There is always turmoil, anxiety, change and opportunity across the financial markets and business environment, and from an entrepreneur’s point of view, the name of the game is to figure out where the risk is, and then where the opportunities might be to move forward.

Nobody really knows if we are heading into a new financial crisis per say, but what is clear, is that things have changed of late, and particularly in the credit markets, and across the banking world, as we start to see more banks go out of business across the world.?

A couple of weeks ago on this platform, I spoke at length about the repricing of money, and how that was going to change, well, almost everything.

Charlie Munger talks about the problems in the property market in the US, and he is specifically talking about the fact that as the cost of funds increases, it is going to become increasingly difficult for property owners to refinance their portfolios, and keep up with interest payments.??This issue is not restricted to the US of course, as we are now seeing that in our own business, particularly for those parties who need to refinance existing facilities.

The fall out of this is the fact that more properties will start to come onto the market, and as debt is harder to come by, and much more expensive, values will very quickly start to become?suppressed, so what happens then? Well, prices start to fall, and that is also happening closer to home.

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In the last two months in Belfast, I am starting to see more and more commercial property come onto the market, particularly from the commercial agents.??

These same agents have for the most part been twiddling their thumbs over the last two years, as transactions have been quite low, as we all tried to work our way?through the pandemic.???

Just last week we have seen local agent Savills bring two of Northern Ireland's most well known shopping centres to the market, namely Forrestside in Belfast, and Foyleside in Derry, owned by London investment firm Kildare Partners. These same centres were purchased some 10 years ago for c. ￡140M, but today, if you could rustle up ￡70M, they could be yours.....

I thought real estate was supposed to be an asset?.... doesn't assets grow in value over time, not reduce some 50% in 10 years?

Confused? well of course I am using an extreme example here, but it really does set the scene for what could be a new phase on the property market, where assets trading at significant discount, or dare I say it - price correction - is the norm.

My prediction as we continue to move through 2023, is that we are going to see a lot more properties come to the market. Largely this will be as a result of the fallout from the interest rate increases, as more expensive money starts to take hold on many of the prop co’s operating on this island and across the UK.?

How are the Irish Banks doing??

A quick comment on the Irish banks, and the word is that they are in pretty sound footing this time round, should this crisis continue to escalate.

They should be, I hear you say, as they’ve spent most of the last 15 years trying to repair their own broken balance sheets following the 2008 crash.?

It is fair to say that many Irish banks haven’t been very active in the local property lending scene in the last ten years, and having seen some of the terms they have been putting out to some of our clients of late, their appetite for risk remains incredibly low.?

In the context of this article, and some of the concerns I am sharing, this is a good thing of course, in terms local banks ability to come through another financial crisis, if that is where we are all heading.??

So to conclude, it is safe to say that we are in challenging times across many fronts, and it is important, that if you are a business owner, and you have loans maturing in the next few months, and you need to refinance, or a new source of funding, you really need to get your ducks in a row, sooner rather than later.

In our businesses across GDP, we are always working on a range of funding deals at any one time, and I have noticed of late, that we have had to be a little more creative, to get some of the deals we are seeing to work, and meet the criteria of our funding partners.?I don't see this changing in the short to medium term.

Have a great week, and thanks for reading.

CD

Conor Devine MRICS,?has been working across the property, debt and funding markets for over twenty years, and is passionate about helping others in the industry overcome challenges and to reach their business goals.?