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Commercial Real Estate: PIIGS Getting Roasted!

  • Written by Syndicated Publisher 2 Comments2 Comments Comments
    June 7, 2012

    A few months ago, I warned all to ‘Watch As Near Free Money To Banks Fails To Prevent Nuclear Winter For European CRE’. This warning was an offshoot of the extensive research that I did on the European banking sector, sovereign debt and CRE. In a nutshell, I said It appears as if there were a few who failed to heed said sage warning. Bloomberg reports Commercial Landlords Fail to Pay Loans Amid Crisis, Moody’s Says

    Landlords of commercial properties in Europe are struggling to repay mortgages as banks pull back from refinancing the loans, according to Moody’s Investors Service.

    And the reason they are pulling back has been well documented on BoomBustBlog for some time. See Is Another Banking Crisis Inevitable? 04 February 2011

    Seventy-nine percent of the loans packaged into commercial mortgage-backed securities rated by Moody’s that came due in the first quarter weren’t repaid on time, Frankfurt-based analyst Oliver Moldenhauer wrote in a report. The non-payment rate more than doubled from 35 percent in 2009 and reflects “the current weak state of the lending market,” Moldenhauer wrote.

    Whoa!!!! And to think everyone is worried about sovereign debt in Europe. Once all of that rapidly depreciated real estate collapses mortgages that have been leveraged 30x, you’ll really see the meaning of AUSTERITY! I’m trying to make it very clear to you people, you ain’t seen nothing yet!!!

    The economic slowdown is hurting landlords of properties from office blocks to car parks and shopping malls across Europe. A total of 38 billion euros ($47 billion) of commercial real estate loans come due this year and next, Moody’s said.

    “As banks need to deleverage due to regulatory requirements, commercial real estate financing will remain constrained,” Moldenhauer wrote. “Most loans will not be repaid.”
    “Not only can underwater loans not be refinanced, borrowers also face difficulties refinancing moderately leveraged loans that are simply too large in the current lending market,” said Christian Aufsatz, an analyst at Barclays Plc in London. “For CMBS, the situation will become worse.”

    Real estate with mortgages that match or exceed the value of the property — a so-called loan-to-value ratio of 100 percent or higher — suffered defaults in “nearly all” cases in the first quarter, Moody’s said. About a third of borrowers with LTV ratios of up to 80 percent didn’t pay up on time, according to the report.

    Keep in mind that the LTV of these properties are safe in the 50-60 LTV range. We’re now discussing 80 to 100+ LTVs. Think about it? Whose going to cough up the missing equity? Quick answer – bank equity investors! More thought out answer – Taxpayers the world over as their hardheaded ass government officials rush in once against to try to bailout banking systems that are too big to be bailed out, leaving what few decent sovereign nation economies left insolvent – once again!!!!
    Most of the loans that were repaid were for less than 25 million euros, while just one of the 15 mortgages worth 75 million euros or more was paid on time, Moldenhauer wrote.

    As queried many times on this blog, “What do you think, pray tell, happens when the liquidity starved, capital deprived, over leveraged banks fail to roll over all of that underwater EU mortgage debt?” Excerpted from Watch As Near Free Money To Banks Fails To Prevent Nuclear Winter For European CRE:

    So, what is the net effect on real estate as thousands of underwater mortgages come up for rollover on depreciating real property?

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    So are there any concrete examples of all of this Reggie style pontification? If course there is. Do you see that chart above where the tiny country of the Netherlands is one of the largest per capita contributors to these bailouts? Well, you don’t think all of the expenditure (to be) is free do you? Here are some screenshots of a prominent Dutch property company, on its way down the tubes – subscribers reference (click here to subscribe):

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    My next posts on this topic will delve into US REITS, global (but EU based) insurers and banks who have the exposure to make ideal shorts considering “The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

    Stay tuned!

    My next post on CRE will show how this is not just a European phenomena. Yes, US REITS will come crashing back to reality as well. Subscribers should pay attention as I ladder puts and shorts into this REIT which we have calculated to fall roughtly 95% in value if math comes to the forefront. To date, the price has not broken out of a relatively narrow range, which means the opportunity is still there. I am considering making the research public after it is clear all long terms subscribers have attained positions.

    icon Cashflows and Debt Preliminary Analysis (493.89 kB 2012-01-19 09:19:16) – compete cash flow analysis showing this REIT coming up short in every possible practical scenario.

    icon Fire Sale Scenario Analysis (303.76 kB 2012-02-10 09:17:04) – illustrates the situation if a fire sale was pursued to raise cash.

    icon Foreclosure Scenario Analysis (414.15 kB 2012-02-09 10:16:12) – illustrates the situation if properties were allowed to go into foreclosure to ease debt service.

    icon Sample Property Valuation (360.45 kB 2012-01-26 09:03:33) – one of over 40 property valuations performed by hand, with on the ground inputs using our proprietary valuation models.

    I will go over this opportunity in more detail over the next 72 hours as well as reviewing the path taken by European real estate to show what can be expected here in the US and the FIRE sector.

    Please note that we independently value REIT portfolios – property by property – with independently sourced rents and expenses to ascertain a truly accurate valuation picture. This is how we called the short on General Growith Properties in 2007, a year before they were downgraded from investment grade status and still buys on them from all the major sell side houses that followed them. I rode GGP down from the $60s to about $8, the shares eventually fell to $1 and change or so. The General Growth Properties short generated returns deep into the three digits… Deep enough to come close to registering a four digit return.

    Follow me on Twitter: http://twitter.com/#!/reggiemiddleton. Click here to subscribe to BoomBustBlog research!

    Images: Flickr (licence/attribution)

    About The Author

    Reggie Middleton is an entrepreneurial investor who guides a small team of independent analysts to uncover truths, seldom if, ever published in the mainstream media or Wall Street analysts reports. Since the inception of his BoomBustBlog, he has established an outstanding track record
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