Sunday, January 11, 2009

Those Who Bet Against CRE

It's no wonder REITs were down 41% in 2008 and the CMBS market is pricing for a 30% default rate when you have investors like this betting against commercial real estate. Read the post yourself, some of the logic and conclusions are completely absurd. A small example:

A reasonable person would look at the data and conclude that banks probably decreased holdings in commercial mortgages as the securitization market dried up…by now, we all know that the people running the banks are neither reasonable or rational.

The irrational behavior is glaring, from Q1 2007 to Q3 2008 banks increased commercial loan holdings by 15% while the securitization market collapsed. It is now estimated that commercial banks hold 43% of the $3.4 trillion commercial mortgage loan market.
Ahh, I beg to differ. Why wouldn't banks' holdings in commercial mortgages go up? Shouldn't the logical conclusion be that when the securitization market dried up, the banks had to keep more mortgages on their balance sheet because the mortgages couldn't be refinanced/secutized via the capital market?

The same author also wrote this piece. An excerpt:

The nature of commercial real estate loans require REITS (and other borrowers) to finance for shorter periods of time (5-10 years) with a balloon payment often attached. Foresight Analytics and the Real Estate Roundtable estimate that between $160 -$400b needs to be refinanced in 2009. Typically, REITS could borrow money from their investment banker; the banker would package the loan into a CMBS and move to the next deal. Unfortunately, due to the credit crisis and rising delinquencies, the CMBS market has virtually shut down. Left unattended this could be the next WMD for the financial markets. As the economy weakens, REIT cash flows will suffer at the exact time that they need cash flows to support new debt.
There are at least three fundamental misconceptions in this paragraph, and one of them is about financing options for REITs. While some REITs ("GGP") tapped into the CMBS market, most REITs borrowing are from corporate lines of credit.

There goes another blog you don't need to read.



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