29 Feb 2016

‘It’s not quite 2007, but stay vigilant’ by Richard Croft as published in Estates Gazette

29th February 2016 – Richard Croft talks on investment, learning from mistakes, ‘new normal’ and over-confident deals.

Read the full article featured in Estates Gazette magazine below.


In the dark days of 2008, I was asked by a friend, who was a school governor, to give a speech to a business studies group about being a successful entrepreneur.

I expressed my reservations, because at that point I was the opposite. Eventually I agreed talk about the credit crunch, which I knew a lot about.

Some days later, in front of around 25 pupils, I began. With end-of-term parties being planned, they may not have been that interested, but I hope enough attended so when the next crash inevitably arrives, they might remember a small, dishevelled man droning on about the warning signs of impending doom and understand them.

My talk centred on three signs (which I missed) that heralded Armageddon. First – the reason I am writing now- was talk of the “new normal”, or worse, the “new paradigm”. I find the use of the word paradigm terrifying, but people like it and I am now hearing it again. History should have taught us that there is no such thing – every market is cyclical – but humans are conditioned to think that “this time it’s different” – cue Einstein’s definition of madness.

The second sign, was that banks were lending at rates they shouldn’t. Fortunately, senior debt of 65%-plus is very rare, so we are not there yet, though some pretty punchy margins are available. The third sign, the real bell-ringer, was deals being done which leave you mystified about how they made money – which they didn’t.

I have seen some bullish deals in the past few months, but we now face a quandary: a new ingredient could be creating a “new normal” – 0% interest rates. This, and 0% inflation, means real income from real assets looks attractive against a backdrop of instability in global capital markets and a commodities bloodbath.

I heard a comment recently about the risk of property values running ahead of occupier fundamentals. While difficult to disagree with per se, the opposing view is that multi-let regional property in northern Europe still trades at a gross yield gap of around 650 – 700bps against the cost of debt, some 400 – 500bps behind 2007’s gap, even in the UK. So despite secondary real estate values rebounding substantially over the last 18 months, I would say the sector still offers value on an income basis.

And it is there that the market distortion of 0% rates (particularly when 5-year Eurozone swaps are negative) is most keenly demonstrated through a divergence of capital values (looking expensive) and income (offering value). With substantial yield gaps and low or negative long term interest rates it is difficult not to feel bullish about the return prospects for real estate in much of Europe, except cities like London, where different rules apply.

On balance, I believe that the demand for yield and demonstrable dividend will only grow, particularly as, recent equity market turmoil aside, the real economy is in good shape, with steady growth of around 2% p.a. underpinning occupiers’ ability to pay rent.

To conclude, ultra-low interest rates will continue to distort our markets and it is likely we entered a super cycle in 2009 with some way still to run, and medium term investment values will be protected by the free cashflow that property generates.

Richard Croft CEO and co-founder of M7 Real Estate