In November 2008 a panelist at the ninth annual European Real Estate Opportunity & Private Fund Investing Forum had the following remark: “Is CMBS dead? It can't be dead--there's no other place to get [that money] from” I guess it is relatively fair to say that if CMBS is not clinically dead, it is in a very deep coma.
European real estate markets were less relying on the CMBS market than the US markets. Nevertheless the share of the CMBS market has been constantly growing and it is estimated that more than 20% of the commercial real estate financing was financed through these markets. That still leaves us with a significant number of billions of commercial real estate financed in the CMBS markets…
Clearly the freeze of the CMBS market had led to first blow to the investment market. CMBS, balance sheet lending, or German cover bonds (Pfandbrief) have one after the other (and not necessarily in that order) fallen victim of financial downturn. This has in return led the real estate market to the state of quasi paralysis as we know it across Europe. There might as well be a “wall of equity” waiting to be invested in European real estate, as long as there is no debt available, it is likely to be a virtual wall for some time.
I believe however that this is just the first wave of a much more profound shock which is still to come. Real estate as a capital intensive asset class uses a lot of debt. The average debt maturity of a real estate loan is somewhat between five and seven years. At maturity, the loan needs to be paid back, i.e. the assets need to be sold, or the loan refinanced.
This is what in my view should lead us to the second blow of some of the investment markets. It is relatively clear that the amount of loan outstanding exceeds by far the available capacity of the refinancing market. Even if I was to take a very optimistic view and assume that the banking sector will restart expanding its balance sheets (which I don’t expect to happen soon) the numbers would not add up. We will necessarily end up in a significant shortfall of liquidity.
So what happens then? I guess it will all depend on what kind of assets we are talking about. At the end of the day this is what it will tie to. Available liquidity will naturally be allocated to higher quality assets, whereas lesser quality assets (or should I say financial assets?) will not find financing. Lenders will have little choice but to restructure the loans most probably though debt to equity swaps. They will then end up owning distressed real estate assets.
You might argue that this is probably not going to affect the CMBS market more than balance sheet lenders. It will. CMBS was the less restrictive loan market with limited covenants and therefore will show no sign of deterioration before the take-out date. They are managed in a very administrative way that does not necessarily look at economic or underlying risks. Beware of performing CMBS. Performing means that the loan is managed in line with the legal documentation (which remember might have no covenant at all). Performing does not necessarily mean that its economic works. And finally, while borrowers can sit down at the table and discuss a loan roll over with banking syndicates (although it takes time and effort to discuss with more than 10 different banks at a time), it will prove very difficult to do so with the thousands of bond holders of the CMBS. Not to mention the different alignment of interest that the CMBS structure intrinsically creates.
The investment market accelerated in 2005, and peaked in 2007. The refinancing will mainly come to the market between 2010 and 2013. By then a lot of things can happen. Or not.
Olivier
I agree with you - and most of german real estate companies seem to have trouble, according to what reits in deutschland wrote today:
ReplyDelete04.03.2009
Umschuldungsbedarf
Unter den zehn größten Immobilienholdings hätten sieben Unternehmen eine Schuldenquote von mehr als 65 Prozent, berichtet Bloomberg.
"Deutschlands Immobilienunternehmen kämpfen ums Überleben", berichtet die Nachrichtenagentur Bloomberg. Die zehn größten börsennotierten Immobilienfirmen Deutschlands hätten kurzfristige Verbindlichkeiten in Höhe von insgesamt 4,2 Milliarden Euro in den Büchern stehen. Insgesamt 3,2 Milliarden Euro alleine davon würden auf Patrizia Immobilien, Vivacon und IVG Immobilien entfallen. Teile der Verbindlichkeiten müssten schon im April refinanziert werden. Die Verbindlichkeiten der drei Unternehmen seien aber mehr als fünfmal so groß wie ihr kombinierter Marktwert. Dieser sei in den vergangenen zwölf Monaten insgesamt um etwa 80 Prozent abgesackt. „Es würde mich nicht überraschen, wenn die Banken bei einigen Immobiliengesellschaften bald den Stecker ziehen, wird Matthias Schrade, Analyst bei GSC Research, in dem Artikel zitiert. Die höchste relative Verschuldung habe laut Frank Neumann, Bankhaus Lampe, Patrizia Immobilien mit 80 Prozent. Die Gesellschaft habe Verbindlichkeiten von 1,3 Milliarden Euro angehäuft. Davon würden Darlehen von über 530 Millionen Euro Ende dieses Monats fällig. Die Gläubigerbanken könnten das Unternehmen zu einer Kapitalerhöhung zwingen oder es insolvent gehen lassen. Patriza bestreitet dies. Das Unternehmen sei im Gespräch mit den Banken. Es gebe keine Hinweise, dass die Kredite nicht verlängert werden. Einer der größten Gläubiger von Patrizia sei nach Angaben von Sal. Oppenheim Jr. & Cie. die angeschlagene Hypo Real Estate.
Dear Olivier,
ReplyDeleteI really like your initiative of starting a blog like this. In my opinion, communication is desperately needed in these times of uncertainty and the way I see this, you are making the right move.
I'm very sorry to criticise at this point, but I have two things on my mind, while reading your latest blog entry.
First, your intention to provide interested readers with thoughts and opinions about the current situation without touching alstria's business doesn't really work, the way I receive it.
Your latest blog post spurs the concerns of current and potential investors that businesses like alstria are on the verge of a breakdown once it comes to refinancing the current loans. It might be a complete coincidence that alstria has lost 20% of its market value in the two business days following your blog post, but it might as well be a consequence of your (unnecessarily?) negative outlook or the fact, that you didn't point out clearly that alstria wouldn't be affected by the scenario you draw because it is not financed by cmbs in any way and has already undertaken steps to refinance a loan maturing in Q4 2011 instead of waiting for the "crunch" to come.
The way I see it, you have managed this company in a very responsible way so far and I have complete confidence that you will continue to do so in the future. Nevertheless, I seriously doubt whether current or potential investors are able to distinguish between your statements as a boardmember and your statements as a "private" person airing his thoughts in a blog.
What do you think about my concerns. I would appreciate to hear your thoughts on that matter.
Best regards,
Thomas
I fully agree. Further more, the General Growth Properties bankruptcy in the US, will have long-term problematic consequences for securitization in general and CMBS in particular.
ReplyDeleteGGP owns over 200 properties, 158 of which were included in the bankruptcy.
Of the 158, roughly 90 are held within CMBS and CRE CDOs. These deals have mortgages with outstanding balances of about $9.5 billion.
GGP filed for bankruptcy on 16 April and attempted to claw back a number of commercial property loans that had been securitized.
On 13 May the judge ruled that General Growth could go ahead with its plan. This was a punch in the gut to holders of CMBS that are drawn on these properties. With a consolidation, the court has effectively blown through the legal isolation that underlies all structured finance.
This will have a catastrophic impact on bankruptcy precedent and the CMBS market. CMBS investors are getting affected and will get affected in ways they neither imagined nor bargained for.
Here in Europe, Windermere XII (the Coeur Defense building) has been a sample of the painful restructuring process that awaits the CMBS industry in 2011 and 2012.
Looks like we might only be at the beginning of the pain...
Marcos
Olivier,
ReplyDeleteI fully agree with your view. Further more, the General Growth Properties bankruptcy in the US, will have long-term problematic consequences for securitization in general and CMBS in particular.
GGP owns over 200 properties, 158 of which were included in the bankruptcy.
Of the 158, roughly 90 are held within CMBS and CRE CDOs. These deals have mortgages with outstanding balances of about $9.5 billion.
GGP filed for bankruptcy on 16 April and attempted to claw back a number of commercial property loans that had been securitized.
On 13 May the judge ruled that General Growth could go ahead with its plan. This was a punch in the gut to holders of CMBS that are drawn on these properties. With a consolidation, the court has effectively blown through the legal isolation that underlies all structured finance.
This will have a catastrophic impact on bankruptcy precedent and the CMBS market. CMBS investors are getting affected and will get affected in ways they neither imagined nor bargained for.
Here in Europe, Windermere XII (the Coeur Defense building) has been a sample of the painful restructuring process that awaits the CMBS industry in 2011 and 2012.
Looks like we might only be at the beginning of the pain...
Marcos