Real estate investing making a comeback

Lori Holland is looking up as she walks through a two-century-old house on Lime Rock Road in Smithfield.

“I’m trying to count how many ceilings have to come down,” she explains. “We’re trying to get a handle on what is it actually going to cost before we can get a tenant in.”

Holland and her husband, Stephen E. Holland, hope to buy the house, which is listed at $174,900, as an investment and rent it as two apartments. Improvements before that can happen could cost $100,000.

While the Rhode Island housing market has been on the slide for three years, the Hollands’ plans to make a real estate investment may be part of a revival, though the signs are conflicting.

House prices are at seven-year lows, with the median around $180,000.

But unemployment is high, with nearly 60,000 Rhode Islanders out of work.

Mortgage interest rates are at historic lows, below 5 percent on a 30-year fixed-rate loan.

But banks have tightened credit, requiring better credit scores and more money down.

S. Lawrence Yun, chief economist for the National Association of Realtors, said at a recent conference in Warwick that the Rhode Island housing market might see signs of renewed vigor this year, especially in the second half, but that a full-fledged recovery won’t materialize until next year.

Several local real estate professionals think those signs are already appearing.

“I’m seeing the investors taking advantage of properties that are priced well,” said Karl A. Martone, the real estate agent showing the Smithfield property and president-elect of the Rhode Island Association of Realtors.

Martone also said first-time buyers, spurred by an $8,000 federal tax credit, are starting to enter the market along with empty-nesters, who probably have high levels of equity in their houses and who may walk away with cash in their pocket after scaling down.

The Realtors association recently reported that the median price of a single-family house dropped more than 25 percent in the first three months of the year, compared with to the same period last year. For the same period, the number of sales stayed about even. And houses were taking slightly longer to sell. None of those factors exactly indicate a market about to soar.

But Martone and Stephen C. Tetzner, vice president of the Rhode Island Mortgage Bankers Association, said the first three months of the year were too soon to see the effects of low interest rates, low prices and the tax credit, which was enacted in February. Because the process of buying a house takes several months, any surge in the market wouldn’t show up until the April-May-June quarter is reported, they said.

Both said they have seen signs recently that things could be leveling off, if not improving.

Open houses have attracted more buyers, Tetzner said.

Cash crisis as insurers withdraw

VULNERABLE retailers and suppliers across a raft of industries face a potential cash-flow crisis as trade insurance underwriters, most notably industry leader QBE, curtail their exposure to the sector.

The pull-back in cover has caused deep concern in Europe, where it is having a similar effect on stifling commerce as the lack of credit availability.

Locally, The Australian understands electrical goods manufacturers have been told they will not be covered in relation to goods sold to two well-known retail chains, or will be made subject to more onerous conditions such as 14-day payment terms.

Until now trade insurance, also known as receivables protection, has been a low-profile service routinely extended to suppliers. Locally, QBE has the lion's share, competing with Coface Australia, Euler-Hermes and Atradius.

But international failures such as Circuit City, once the biggest US electronics chain, Woolworths in Britain and, locally, Kleenmaid's $70 million collapse have prompted insurers to tighten the terms of cover.

"If a credit insurer is not prepared to provide credit insurance for a particular retailer, that has to throw up massive warning signs for the supplier," said one local retailer. "It's kind of the opposite of caveat emptor: it's seller beware."

National Association of Retail Traders managing director Kay Spencer said "clear offshore trends", especially in Britain and Europe, implied a looming crisis. It is understood that an influential industry delegation has already approached Canberra with a proposal for a scheme to protect uninsured enterprises.

The British Government last month introduced a $10 billion trade credit insurance scheme available to 14,000 mid-sized businesses, "to mitigate against disruption to the supply chain and cash flow of 250,000 companies they do business with".

According to several insurance sources, QBE took a closer look at its so-called credit and surety business after the departure of two key executives to start a niche practice.

Among other measures, CEO Frank O'Halloran implemented risk management procedures such as weekly reporting. A rival insurer said: "Their guys are doing report after report. Frank is right on this but fortunately or unfortunately they are not pulling out of it."

QBE, the country's biggest general insurer, has exited excessively risky or unprofitable business lines in the past. Last year it stopped selling indemnity cover to stockbrokers and financial advisers after being stung by huge payouts to share traders after the collapse of Opes Prime.

Niche providers are also active in the credit insurance market. "But if one company won't cover, the others will knock you back," Mr Uechtritz said. "The global financial crisis has made people do things a little bit differently."

Attempts to contact QBE were unsuccessful, while other insurers and retailers were reluctant to comment on an issue prompting growing behind-the-scenes angst.