It is good that Europe has been able to use baling wire and bubble gum to get past the immediate crisis, but they are far from fixing the real problems underlying the crisis. All of this should bode well for US real estate. The real issue in Europe is the underlying politics of the entitlement state where nobody really needs to work hard because you can’t really get fired, and if you are unemployed there is money from the state to keep you living well. Between unemployment and health care, and other socialist programs, you are not left in tough straits. Add to this the crushing red tape and bureaucracy, and the corruption still prevalent in some countries, and there is no incentive to start new businesses. This is especially true in Greece and Italy. Lastly, there are several of the problem countries where few pay taxes and none pay accurate taxes. Everyone has a good pension and nobody has a sense of fear of going hungry. Add to this the spectacle of Berlusconi who has for felony charges against him and who has parties with seventeen year old hookers. The fate of the Euro and in turn the world economy hangs on a guy like that.
To make all of that entitlement basket happen the PIIGS took on enormous amounts of debt and just kept mollifying the voters with more and more of the same socialist programs. It worked so long as the bubble economy kept the game going. The cultures of several of these countries was never one of hard work and honest behavior. That is the real difference in Europe, and why the Euro never made any sense. The Germans, the Dutch and the Scandinavians have a totally different culture and work ethic. Even the French have a better attitude. The result is a major clash of cultures which led to the present crisis. The Euro Zone could never really work over the long term because they were trying to combine apples and oranges and make gold.
While they have momentarily covered up the problem, they have yet to figure out how to fund the new commitments. China may come in but they will extract a heavy political can trade relations price to do so. Unlike during the cold war, China can buy influence instead of having to use missiles and a threat of war to gain what they want. We are just at the start of watching how China uses it $3 trillion of currency reserves to influence world events and gain power.
Europe will still have to go through massive restructuring and austerity. That is very likely going to lead to many more violent street clashes and in time to the potential for the ultimate breakup of the Euro Zone into two differing groups, north and south. Their economies will continue to struggle for several more years as this is just the third inning and we have a long way to go. Germany will do whatever it can to hold the Zone together since its export economy depends on having a weak Euro. If they ever go back to the Mark then German exports get crushed.
For US real estate all of this has benefits. Europe will remain weak and in some level of crisis for several more years. Their banks will remain under pressure to reduce assets to meet the new capital ratios and that means less lending. That means less economic growth in Europe where business depends on banks for loans and much less than here on the capital markets. Government austerity to get the sovereign debt back under control will make slow growth even more likely. Interest rates will have to remain low here and in Europe to accommodate the weak economies. The US economy will be weaker than it might have been since its biggest export market- Europe will remain weak. Add to that the US housing market problems which have several more years to run, and there is little chance rates in the US will rise a lot for several more years.
Investors may think buying European debt is a good play, but why would you want to invest in Europe where there will be continued slow growth, the potential for social unrest due to the economic dislocations, growing problems with Muslim immigration stirring even more social unrest even in Scandinavian countries, and likely significant changes in the political leadership of several countries as these social and economic dislocations play out. Investing in the US and Asia has to be a far better scenario on a risk adjusted basis.
Eventually the US economy will improve. If Obama loses the election, which is now highly likely, then whoever wins has to be a huge improvement to the investing psychology. It can’t be worse. If Obama is gone, then Dodd Frank will get rewritten, Obamacare may be overturned by the Supreme Court, but will surely be so with a new administration. Boeing will be allowed to open its plant and add jobs, and banks will be allowed to go back to lending and not litigating. The stock market will rally. The EPA and NLRB will be put back into a box, instead of regulating us to death. Unions will once again be reduced in influence and that will allow state and local governments to once again get to grips with their pensions and excessive teacher compensation and tenure rules. The investing landscape has to be much better. Even if Obama wins, it will be better to own real estate in the US than in Europe.
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Joel Ross
Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.
