HFF Research Update for July 6, 2016: Better Late Than Never?

Wednesday, July 6, 2016

Weekly insights on current research in the commercial real estate industry from HFF Managing Director of Research Jimmy Hinton. View Daily Rates on the HFF website.

Born only a peasant, Joan of Arc claimed premonitory visions of saints and angels instructed her to take up arms in support of her native France against England in the Hundred Years’ War. An inspired Charles VII, future King of France, dispatched her to Orléans where she led a week-long fight to end England’s siege, turning the tide strategically and symbolically to France’s advantage.

Forces sympathetic to the English captured Joan of Arc a year later. She was promptly declared guilty of heresy and burned at the stake, her ashes spread in the Seine. But on this day (+1) in 1456, her verdict was overturned. Joan of Arc’s life spanned only 19 years and, as with most sanctifications, her gruesome fate inspired her canonization when in 1909 she was beatified by Pope Pius X at Notre Dame Cathedral.

Some would say “too little, too late.” Hoping to avoid a similar case of hindsight, the Italian-born chairman of French multi-national bank Societe Generale is voicing his backing of state-sponsored support for several banks in Italy before conditions are too far gone.

In the wake of the Brexit vote, we brought attention to European bank shares’ decimation in value on lower growth estimates and the likelihood of protracted low (or negative) interest rates. Simply stated, negative interest rates hurt net interest margin, a key measure for bank profitability. Below is imagery conveying the total amount of sovereign debt offering negative interest and global debt yields relative to our own.

Nowhere is the above impact more deeply felt currently than in Italy, where more than 15 percent of loans are delinquent, more than 10 times the rate here in the U.S. and three times our highest delinquency rates at the depths of the Great Financial Crisis. From The Wall Street Journal: “All this threatens to spark a crisis of confidence in Italian banks, analysts say. Although Italy has only one bank classified as globally significant under international banking regulations – UniCredit – some analysts say bank stresses worsened by Brexit could threaten Italy’s stability and, potentially, even that of the EU. ‘Brexit could lead to a full-blown banking crisis in Italy,’ said Lorenzo Codogno, former director general at the Italian Treasury. ‘The risk of a eurozone meltdown is clearly there if Brexit concerns are not immediately addressed.’"

Back to the Italian chairman of the French multi-national banking institution, Mr. Lorenzo Bini Smaghi appeared on Bloomberg early this morning and plead: “We adopted rules on public money; these rules must be assessed in a market that has a potential crisis to decide whether some suspension needs to be applied.”

The world has certainly taken notice of the deterioration of the banking system in Italy and how it might play out across Europe. Global bond yields are testing all-time lows across many geographies. Meanwhile, equity markets are see-sawing between losses and gains as they digest The Federal Open Market Committee (FOMC) minutes and economic data that, frankly, is “too little, too late.”

The Dow Jones Industrial Average has turned to positive territory today after FOMC minutes obliterated any notion of a rate hike in the near-term and after an Institute for Supply Management (ISM) release pointing to purchasing managers index expansion in June.

But are those points relevant anymore? I am already asking the same question of Friday’s employment update from the Bureau of Labor Statistics. It is pretty obvious the world changed trajectory on June 23. Any economic data point covering a prior period only conveys our footing leading up to that surprise.

Bottom line: the United States is once again the bastion of hope to carry investors through volatile headlines that once covered instability in China, the junk bond market, political corruption in South America and war in the Middle East but now relate to Brexit and uncertainty in the European banking sector.

Summers are sometimes volatile, it’s just come a little earlier this year.

Sources: HFF Research, Bloomberg, ANZ Research, FactSet, ThomsonReuters, JPMorgan, The Wall Street Journal, World Bank, European Banking Authority

About Jimmy Hinton

Jimmy Hinton serves as managing rirector of HFF and is responsible for the firm’s national research efforts. Mr. Hinton works with the executive management team, assisting in investor relations and providing both HFF employees and firm clients with in-depth analysis of economic, property and capital market trends. Additionally, he provides extensive market reports, client presentations and deal-specific analysis for debt placement and investment sales assignments. Mr. Hinton works with pension funds, life insurance companies, regional and CMBS lenders, REITs, foreign investors and private equity funds.

During his tenure at HFF, Mr. Hinton has supported the execution of more than 150 commercial real estate transactions totaling more than $4.5 billion in 20 states. Mr. Hinton has experience in fixed- and adjustable-rate debt, mezzanine debt, construction loans and joint venture executions on behalf of clients engaged in the acquisition, development and recapitalization of property types including multi-housing, industrial, office, retail, medical office and storage properties.

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