Monday, Oct 19, 2009

Commercial Real Estate Credit Crunch in slow motion

Commercial Mortgage Alert: 10/16/2009 Lenders Gloomy as Credit Crunch Drags On

The main concern for the next few years is the overhang of maturing debt that won't qualify for refinancing. "I think this is a much bigger problem than people realize," said Jack Taylor, a managing director of Prudential Real Estate Investors...Unlike some other investors, many property owners don't have to mark their holdings to market value. So as long as they can make their loan payments, the crunch does not come until loans mature. Long-term leases have delayed the day of reckoning for many office landlords. And extraordinarily low Libor rates have helped borrowers with short-term loans skate by. Also, lenders and owners have a mutual interest in kicking problems down the road. Lenders are willing to extend loans rather than recognize losses that could cripple their capital bases."

Posted by mountain goat @ 03:32 PM (1018 views)
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1. mark wadsworth said...

Tee hee, few people talk about the commercial property price bubble/crash, but we shouldn't lose sight of it. There were some stat's in the FT saying that commercial property loans had increased from £50 billion to £500 billion over the last five or ten years, and a lot of surveys say that selling prices are down a third from peak (even though rents are down barely ten per cent).

Monday, October 19, 2009 03:46PM Report Comment
 

2. mountain goat said...

The thing that peaked my interest were reports on Friday explaining General Electric's 5% fall in share prices: "General Electric Co's $84 billion real estate portfolio remains a worry for investors, who wonder if the conglomerate will have to take big write-downs to reflect the lower value of real estate debt and equity holdings...GE Real Estate, part of the GE Capital division, posted a loss of $538 million in the quarter, double the loss in the preceding quarter." - Reuters

So losses are only just starting/accelerating in commercial real estate. If this continues slowly it will suck up available capital and severely restrict lending for years. If it unwinds more rapidly and leads to high profile defaults mayhem will resume. Take GE for example, the company looks in worse shape than General Motors. GE owes its creditors $518 billion. That is not a misprint. It owns tangible net assets of only $17 billion. Thus, on a tangible basis, it is currently leveraged by more than 30-to-1. That's unheard of for a major industrial company. A 3.3% decline in the value of its asset base would wipe out all of its tangible equity. But here's the real problem. Last quarter, the company produced $2 million in operating income. Again, that's not a misprint. On $17 billion in assets, the company earned only $2 million. So... what will happen to GE if (or when) the free market sets its borrowing costs? GE spent $4.3 billion on interest in the last quarter – thanks to the government's guarantee. So on an annualized basis, GE is now spending roughly $17 billion to service its $500 billion in debt. That's an annualized interest rate of 3.3%. This is not sustainable. Sooner or later, GE is going to have to pay a market interest rate...." source

Monday, October 19, 2009 04:05PM Report Comment
 

3. icarus said...

mg - the $2 million in operating income for the last quarter has to be put into the context of $45 billion earnings, indicated in the article, for the whole year, before interest and taxes. Even then, however, the main point about GE being up the creek still seems to hold.

Monday, October 19, 2009 06:16PM Report Comment
 

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