February 7, 2010

The American real estate market continues to fluctuate between inflation and collapse

By Eric Mirovsky and Asher Schechter

The President of the investment house Taurus, Peter Merrigan and the company’s Business Manager, Guenther Reibling say that the U.S. real estate market is slowly recovering from the big recession – which makes investment in existing assets within the country more attractive.

"Why should I go and look at a property in India, if five minutes away from my office there is property that can yield similar returns, with less risk?", President and CEO of the international real estate investment house Taurus, Peter Merrigan asks rhetorically. The current perception in the industry is that the U.S. market has not yet recovered from the crash, however, one can identify income-producing properties in the U.S. at good prices, and in this sense the situation is different now compared to few years ago, when most were efforts focused on trying to locate good income-producing properties around the world.

Merrigan, along with the company’s main Business Manager, Guenther Reibling, arrived in Israel as part of Taurus’ cooperation with the Israeli investment house, Profimex, managed by Elchanan Rosenheim. The purpose of their trip is to meet the Israeli investors and to update them on the status of their investments. Taurus has assets totaling more than $3 billion in North and South America, Central and Western Europe. Israeli investors are involved in funds worth tens of millions of dollars.

Merrigan came here to visit exactly a year ago and in an interview with TheMarker he sounded pessimistic, saying amongst other things, that the real estate crisis had not yet reached its peak. This year his mood is more encouraging. However, he believes that the crisis in the U.S. is still far from over. "We're at the bottom, and I think we will stay close to the bottom for sometime, while the price of income-producing assets has fallen by 40% and more," he says.

"But the stock market has stabilized; companies are again reporting profits and GDP grew in the last quarter. Towards the end of the year, companies will also start to recruit new employees, which will lead to an increase in demand for commercial space. The current unemployment rate is very high, but when it does drop, demand will rise. I think that now is an excellent time to buy, as opposed to last year. In my opinion, 2010-2011 is a good period in which to buy."

In which U.S. markets is it already possible to see the commercial real estate recovery?

Merrigan: "The situation has begun to improve in Boston, and also in Washington. There will be no new construction projects starting for a long time and there won’t be financing for new projects, or demand for new projects, for many years. First there is a need to absorb the existing inventory and then we must wait for the unemployment rate to drop from 10% to 5% in order for there to be an increase in demand. This creates a very attractive market: if prices fall by 40% and there are no new assets to compete with, that's a good time to buy existing projects."

The U.S. market will recover

Generally, neither one of them see the burst of the American real estate bubble as an unusual event in the market. "In the last 30 years I have experienced at least four to five periods of recession or periods of a slowing market and I believe the U.S. market will recover," says Reibling.

"The U.S. is a strong country with an ability to recover quickly. In the '90s we faced a similar situation. Once the employment situation improves, the commercial real estate market will recover very quickly. The Canadian market fell less than the U.S., and therefore there are fewer opportunities for investment there, which is the same for Western Europe.

Merrigan adds that the U.S. market was and will remain one that fluctuates between inflation and collapse, a market in which "one sells during a boom and when prices start to fall. Now we are in a period of depression, so it’s time to start buying. When the market falls by 40% it is better to be buying rather than selling."

The principles at Taurus are so convinced that there are bargains to be found in the American market, that they have recently slowed their search for income-producing properties in other parts of the world. "Usually you turn to new markets when the markets where you generally do business are exhausted, to a level where further investment will not contribute anything and may even harm you. Today we have many more opportunities in Europe and the U.S. and so we are less interested in looking further afield. It's not that there aren’t opportunities in India, but if there are good opportunities in the U.S. as well, why go to India? ", ponders Reibling.

As far as outside of the U.S. is concerned, Taurus has 115 shopping centers in Germany and projects in Canada, Greece and Turkey. Regarding the precarious economic situation in Greece, Merrigan says that "in Greece we have only one project, a resort on one of the islands. Since we purchased the land for a good price and have a good partner, we are comfortable with this investment. Our project is in the tourism industry, so as long as social chaos doesn’t break out - we're OK."

He doesn’t feel that there has been a change in policy in Turkey, in the way we in Israel do. "Turkey is an ally of the United States and we do not feel that they are turning on the West. From a real estate perspective, we are talking about a country with a young population with an improving economy. So it’s convenient for us to do business there."

Western and Eastern Europe and China, however, are targets for the company's investment. Merrigan and Reibling say that they are considering investing in France and Belgium. In the UK prices have begun to rise again, so at present this is not a location that they are targeting. Regarding the Chinese market, Merrigan says that cultural and business differences as well as the government intervention deter him.

The company may in the future return to Eastern Europe, but not Russia. "I spent a long time in Russia and a rule of law is not established there. Without a rule of law, it is not a safe place to invest in."

Are there other markets in the Middle East that you are considering entering?

Merrigan: "Not right now. Maybe Dubai, surely it must be cheap there right now (he laughs)."

An apartment in the U.S.? Only for living in, not for investment

Is an apartment in Florida for 40 thousand dollars a bargain? Merrigan and Reibling say no. "It's a good time to buy a house in Florida, but only if you need a house there," says Reibling, a resident of Florida. "U.S. real estate suffered from over-speculation - many homes were purchased by investors who intended to sell them. This stems from a bad system and as long as it doesn’t change it will happen again."

The problem is with the method in which people purchase new apartments off-plan, where the buyer pays a deposit, and the balance is paid upon completion of construction. "You do not have to close the deal. If the market falls, you can leave without any further obligation on your part," explains Merrigan. "If the buyer had an obligation to purchase the apartment when the project completes, fewer houses would have been built and there would not be such a problem of over-supply. But if all you have to do is leave a deposit of 5% - why not buy?"

For hasty Israeli investors, it will likely become clear that even though that the price is cheap, there is no profitability in such an investment. Reibling notes that "the U.S. tax on apartments is high, and if the buyer does not intend to live in the apartment for at least several months a year, I do not see any sense in the purchase."

Merrigan: "If you're buying a new apartment as a cheap investment, it will probably fail. The problem is that the constructor usually runs out of money, so the bank is forced to complete the project, and the bank doesn’t know what it is doing. There will be construction defects and shortcuts taken in order to complete the project, and there is a high risk of being sued, especially those who purchase the apartments suing the previous contractor, and therefore you can also expect a long legal process.

"If the tenants committee has no money to fix the roof or the windows because the contractor went bankrupt it makes it risky. If you only buy part of the project, because others have already bought some units, you do not control the board. Therefore, if you can buy at 10% of the price it is ok, but if you buy the apartment for half price – you will have to pay a lot of money on repairing construction problems and legal expenses. People who do not fully understand are certain that it works out to be cheap. But it is a very difficult industry to be in."