Britt Gwinner CFA Principal Financial Specialist International Finance Corporation Viña del Mar 7 May 2010 1 Contents The Basic Picture housing demand around the world How was mortgage finance linked to the recent crisis ID: 508469
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Slide1
Residential Real Estate – Value After the Subprime Crisis
Britt Gwinner, CFAPrincipal Financial SpecialistInternational Finance CorporationViña del Mar, 7 May, 2010
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Contents
The Basic Picture – housing demand around the worldHow was mortgage finance linked to the recent crisis?Going forward
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The International Finance Corporation
Goal: Improve lives and raise living standards through sustainable private sector development
Member of the World Bank Group, owned by 179 shareholder countries, assets USD 51.4 billion, capital USD 16.1 billion
Global—for more than 50 years has focused on developing countries
Local—full time presence in more than 80 countries and activities in many others
Housing Finance Investment Services:
Loans for mortgage lending; Collateralized mortgage lines of credit; Warehouse lines of credit; Credit enhancement for MBS; Structured finance; Equity investments; Construction finance
Housing Finance Advisory Services:
Policy and regulatory infrastructure, mortgage toolkit and training, capacity building
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The basic Picture
Section 14Slide5
Growth and urbanization
World Bank Data Visualizerhttp://devdata.worldbank.org/DataVisualizer/
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6
Real estate: a tale of many markets
Real estate:
more than 1/3 of the value of all the underlying physical capital in the world
Developed countries:
mature residential real estate markets
Populations are stable or shrinking – demand for financing from turnover, renovation, aging population, regional growth dynamics
>90% of housing units in developed countries are of adequate quality
Emerging markets:
large pent-up demand for housing
As countries develop, they urbanize
Emerging markets urbanization has been poorly planned - housing and infrastructure inadequate, housing demand is strong
Self-built houses on squatted land lack connections to sewage or water, built of inadequate materials
44.7% of households in Africa, 25.6% in South Asia lack access to improved sanitation
20 to 30 million housing units in Latin America lack a basic amenity such as running water, or are built of substandard materials
Inadequate housing compounds the cycle of poverty – health, social investment, wealth-building
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7
Mortgages mostly unavailable in emerging markets
But as real incomes rise, so does capacity to make a mortgage payment
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8
Housing
Finance
and
Growth
8
In
emerging
markets
,
housing
finance
is
related
to
new
construction
and as a
result
fixed
investment
, and
generally
with
domestic
inputs,
both
labor and
materials
In
developed
markets
,
housing
finance
is
more
linked
to
trading of
existing
housing
and
economic
cycles
In
the
U.S.,
there
are 7
million
new
loans
each
year
, 6
million
of
which
are
for
existing
housing
In
developed
markets
, real estate and
related
services
count
for
between
2% and 4% of PIB
In
the
U.S., 8 of 10
recessions
since
1949
were
proceded
by
reductions
in
residential
investmentSlide9
9
9
Mortgages and Fixed Investment
In
the
initial
phase
of
development
,
mortgage
finance
can
add
0.5% of
fixed
investment
as a
percent
of GDP
for
each
increment
in
the
size
of
the
market
Source
:
Duebel
(2008)Slide10
10
10
Traditional roles: inflation protection, diversification
Securities backed by inflation-indexed mortgages are natural inflation hedges (Chile, Mexico, Colombia)
Real estate investments can decrease the cost of inflation insurance for long-horizon investors (
Amenc , Martellini, & Ziemann,
Journal of Portfolio Management
, 2009)
IRR of about 11 percent for 60/40 stock/bond portfolio with a varying investment in real estate over time. (Performance of Real Estate Portfolios, Fisher and
Goetzmann
,
Journal of Portfolio Management
, 2005)
International real estate can reduce portfolio risk (Chua,
Journal of Real Estate Portfolio Management,
1999)
A recent comment from Prof. Robert
Shiller
:
“After prices fall, the media begins to publish stories of investor foolishness. Investors, feeling stupid or betrayed, have a “betrayal aversion” that causes them to react intensely and sell in anticipation of future price drops.”
Real estate as an asset classSlide11
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11
Fixed Income
Residential Mortgage Backed Securities (RMBS)
– True sale to special purpose vehicle (SPV) that issues bonds
Long duration, some uncertainty in principal amortization (prepayments), varying structures, stand-alone credit rating, almost no replacement of assets, no recourse to loan originator
In Peru, AAA local scale RMBS provides 32bp over 3y AAA corporate (when
corporates
are available, it’s a thin market), 202bp over 3y sovereign
Covered bonds
– general obligation bonds with contractual and/or legal backing from a portfolio of mortgages
Long duration, prepayments may be mitigated, credit profile a function of issuer’s balance sheet and security portfolio, assets may be replaced, complete recourse to bond issuer
Yields comparable to AAA
corporates
Investment vehicles for residential real estate (1)Slide12
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12
Equity
Rental apartment buildings, property developers, land banks, private equity
Residential rental
- works best where laws permit a reasonable balance of tenant and landlord rights and responsibilities
Rental reforms
recently passed in Brazil, considered in Mexico, others have stronger market traditions (Uruguay)
Hybrid
Real Estate Investment Trusts or Funds
– United States, Asia, increasingly in emerging markets – while tax advantages not relevant to most pension fund investors, return may be
Investment vehicles for residential real estate (2)Slide13
What happened with the crisis?
Section 213Slide14
U.S. subprime boom and bust – finance driven, excessive leverage, weak credit underwriting
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15
What have mortgage defaults looked like?
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16
A largely external crisis
There are no subprime mortgages in emerging markets
Lending generally to high income borrowers, with low LTVs and full documentation
Emerging sovereigns and
corporates
benefitted from low borrowing spreads during the boom
But, macro management has broadly been strong, emerging markets come out of the crisis with relatively low decline in GDP, many cases of growth
At the worst of the crisis, funding retreated to New York, London, Madrid, etc.
Limited development of some capital markets mitigated bad effects –e.g., Egypt, Guatemala
Relatively strong economic performance protected others – China, India, Brazil, Peru
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Going forward
Section 317Slide18
18
What haven’t private pension funds invested more in real estate?
Constraints
Macroeconomic volatility – inflation, inconsistent policies, financial crises - Mexico ‘95, Russia ‘98, Argentina ’01
High real rates + volatility make government debt more attractive
Lack of long term fixed-income instruments, lack of secondary market liquidity, yield curves
Investment channeled through personal rather than institutional means
Uruguay rental apartment buildings built & owned by individuals, family firms
Informal markets flourish because of faulty legal and regulatory structures
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How to boost private pension fund real estate investments?
Lower real rates make private fixed income issues more attractive
Recent history in Chile, Mexico, Brazil, Colombia, Indonesia, India, China, etc.
Promote a range of long term fixed-income instruments, and a range of credit ratings – move away from incentives to pure triple-A markets
Permit securitization, covered bonds, funds, REITs – issuer chooses best execution
Chile as a model – 1980s reforms created AFPs,
letras
hipotecarias
Wider range of pension, insurance benchmarks
Promote secondary bond market liquidity
Benchmark government yield curves – extend maturity, issue to promote liquidity
Strengthen exchanges transparency, efficiency
Improve legal and regulatory structures of real estate markets
More efficient land use planning, title registration, contract enforcement
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Thank you
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Annex - LAC RMBS during the crisis
Reliance on local investors, mostly low mortgage delinquencies, persistent demand from private pensions and insurers
Chile
– Structured issuances up 6 times in 2009 v. 2008, of this, 9% was RMBS
Panama
– La
Hipotecaria
9 RMBS issues through 2008, securitized consumer loans 9/08, rolls commercial paper through 3/09, issues MTNs 4/09 – all to local investors
Peru
– corporate issuances, structured finance for auto, consumer, leasing, and
Titulizadora
Peruana
issues RMBS 02/10, USD 34.5 million, oversubscribed
Mexico
– Severely affected by the crisis, downgrades in RMBS issues by failed lenders, but strong performance by RMBS from major banks,
Infonavit
,
Fovissste
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Annex - LAC RMBS during the crisis (cont.)
Colombia
USDeq
2.4 billion issued since 2002, trading at average price of 104.6 at end March, 2010
UVR (inflation-adjusted), increasingly nominal fixed-rate peso
Prepayment rates have run 10.5% UVR, 14% peso, defaults < 2%
Structured finance volume 2009 almost twice 2008
TC placed
USDeq
791 million in RMBS 2009, more than half of recent issues purchased by domestic pension funds
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Contact Info:W. Britt
Gwinner Principal Financial SpecialistInternational Finance CorporationMiguel Dasso 104, Piso 5
San Isidro, Lima 27, Per
ú
+51 1 611-2573
wgwinner
@
ifc.org
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