Toxic real estate mortgages are holding the global economy to ransom and the banking sector will not return to health without a purge of its distressed property assets, the CEO of Citigroup Property Investors said.
The burgeoning economic rally could fizzle out by the end of the year unless governments take more affirmative action to protect it, by forcing bailed-out banks to sell off distressed property, Roger Orf told the Reuters Global Real Estate Summit.
Any time that you have got clouds on the horizon, it means there is not clear sailing ahead. And these are thunderclouds, maybe even a cyclone, Orf said.
I personally feel the best way to do that is through creative destruction as opposed to a malaise where you let the air out of the tire over a number of few years, he said.
Regrettably, governments are not forcing banks to sell assets and that's one of the fundamental things needed to restore equilibrium to property markets, Orf said.
Orf said he did not expect fully functioning property lending markets to return before 2011, by when he hoped banks will have completed repair of their capital bases through a wave of real estate sales.
Until then, any talk of a sustainable economic recovery was at best optimistic, and at worst naive.
I don't think there are any greenshoots. These greenshoots are weeds, Orf said.
On a macro-level over the last five years, stimulus has come from the consumer or the private sector. This has been substituted by a huge amount of government stimulus ... and that government stimulus, wherever it is, that is going to wear off, he said.
We are all going to wake up in 6 or 12 months time and discover we're back where we started. I'm wary that we could relapse into a significant downturn by end of the year.
OPPORTUNITIES
Despite such gloomy portents, CPI is scouting for discounted opportunities and Orf said the firm's next deal was likely to be in Britain, where prices have adjusted much faster than remainder of Europe.
The company, which manages about $13 billion in gross real estate assets worldwide, is also weighing investment opportunities in the U.S. and UK residential property sectors, the global real estate securities market and nascent property sectors in Brazil, China and India.
Its last notable acquisition was almost a year ago, but Orf said he was in no rush to return to market, despite having around $1.5 billion of potential buying power.
There's no prize for coming first. Anyone buying now is welcome to. We don't need to be first. We'll be second or even third. Let some other man make the first $50 million, there'll be a trillion more to be made, he said.
In keeping with this cautious stance, Orf said CPI had no plans to resume fundraising this year but a change in strategy may come when greed eventually begins to outweigh fear.
In the same way that banks had to re-assess the sources of their capital, Orf said the opportunity fund model also needed some reform to restore confidence in the stricken market.
Greed has a way of getting people's wallets out. A lot of people ask if the opportunity fund model is broken. My view is it certainly needs repair.
The precept is give me your money, I'll invest it wherever I want and you can't have it back for up to 10 years. But on that basis, very few people are interested in taking that wallet out for me or anyone else in the main right now, Orf said.