Zero Hedge in New York Magazine

The New York Magazine has a long piece on the controversial financial blog Zero Hedge. For those of you who follow the blog, the article offers some interesting background of the founder/contributor Dan Ivandjiiski. An excerpt:

The site was launched in January of this year, a few days after Dan Ivandjiiski, who lives on the Upper East Side, lost his job at Wexford Capital, a Connecticut-based hedge fund run by a former Goldman trader.

Blogging may seem like an odd career shift for a well-paid hedge-fund analyst, but for Ivandjiiski, it marked something of a return to the family business: His father, Krassimir Ivandjiiski, is a writer and editor at Bulgaria Confidential, a tabloid known for its controversial investigative reporting. In 1996, the elder Ivandjiiski exposed what he said was political corruption and drug trafficking in, of all places, Montana, in a story republished in the U.S. in a shoestring periodical called Free Speech Newspaper.

I don't read Zero Hedge on a regular basis, but have always found its coverage on commercial real estate pretty solid. While the New York Magazine piece is not the most flattering, personally I find Zero Hedge much more informative than the so called mainstream financial media such as CNBC. I will take Zero Hedge over Maria Bartiromo, Erin Burnett, Charlie Gasparino, Dennis Kneale, etc any given day.

Another interesting piece of information from the article: Marla Siner, contributor of Zero Hedge, used to write Going Private, one of my favorite financial blogs.

And, Matt Taibbi defends Zero Hedge here.

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Weekend Roundup

Corus Auction Promises Property 'Mark' ("WSJ")

Recession Levies Hefty Punishment on CRE Property Values ("CoStar")

CRE Buying Opportunities: Not as Many as Anticipated ("CPN")

Investors Look to Fund Property Owners' Debt Purchases ("crenews")

Foreign Property Investors Deserted US Market in Global Downturn, Report Shows ("Property Wire")

Three Strikes and You're Out ("Trend Czar")

Tougher Rules Keeping Foreign Investors Away From Chinese Commercial Market ("Property Wire")

Making Sense of China Residential Market

Over at FT Alphaville, Izabella Kaminska is making a case that a Chinese real estate crash might be on the horizon. Certainly many smart observers of the China residential market have been making predictions like this for years, yet housing prices continue to soar in China. Since 2003, housing prices have tripled in China, and in 2009 prices reached a new record:

Housing prices in China began to soar again this year. In the first half of 2009, in Beijing, housing prices have increased by about 30 percent. In Shanghai, prices approached a record high of 17,400 yuan (US$2559.0) per square meter (about 11 square feet). In Shenzhen, prices have also hit a record high over the past eleven months.

Using any standard Western economic measures, the Chinese residential market is a bubble. The biggest issue is affordability. According to this post from the Dragonbeat blog, Chinese homes are extremely expensive when you factor in average household incomes:

The standard measure of housing affordability compares average house prices with average household incomes. In developed country markets, prices are generally considered expensive if they exceed four times average annual household income.

The house-price-to-income ratio in most Chinese cities has been well above eight for years, and reaches an eye-watering 14 in the priciest cities. The cost of housing in China looks scarily high.

Another issue seems to be supply. 80% of the China's urban residents already own homes, yet developers continue to buy up land and develop more properties. By now, you must have read stories or seen videos about the abundance of apartment buildings sitting empty in China. According to this excellent piece from Far East Economic Review:

China’s inventory of unsold apartments hit 91 million square meters at the end of last year, up 32% from the previous year.

So why do housing prices in China keep on going up and will the bubble continue to inflate? After trying to make sense of it on my own (unsuccessfully), I summarize some of the contributing factors below:

1. The government. The Chinese government provides significant subsidies to home ownership:

a high proportion of households live in apartments purchased at below-market prices or have upgraded to apartments financed by the sale of a property bought at a subsidised price. This means that the vast majority of households do not spend a large proportion of their income on housing.

The Chinese government will not let the bubble burst until the economy gets better. From Reuters:

Beijing will not want to prick the asset bubble before the economy gets on a solid footing, partly because real estate accounts for as much as a quarter of fixed asset investment.

Some local Chinese governments manipulate land prices to boost growth. From ChinaStakes:

They are joining in the bidding for local land through government-controlled companies in order to get loans from banks, so bank loans can be transformed into governments��?fiscal income. Some local governments have even ordered state-owned enterprises under their control to enter the real estate market to boost housing prices.

2. Unlike US or other western countries, there are no property taxes or other carrying costs for owning residential real estate in China.

3. The Chinese currency is not convertible, and there are limited options for investment in China. From Far Eastern Economic Review:

Unless they already possess offshore funds, Chinese citizens have limited investment choices: they can gamble on an unstable domestic stock market, buy low-yielding government bonds, or stash their cash in even lower-yielding bank deposits. By contrast, real estate—occupied or not—offers them a visibly reassuring place to park their money, sheltered from inflation.

4. Official household incomes might be under reported. From Reuters:

Admittedly, prices look excessive if compared to income, especially in Beijing and Shanghai, where monthly mortgages now account for 76 percent of income on average. However, the figure is distorted because official incomes are undervalued by as much as 42 percent, according to a paper authored by Wang Xiaolu of the National Economic Research Institute.

Taking that into consideration, mortgages only account for a more reasonable 35 percent of the mid-income group and 23 percent of the high income group in Shanghai, according to Chinese brokerage firm CICC.

And Finally,

shifts in income distribution in the last decade mean that a significant minority of home buyers can continue to push prices up, even as low-end buyers find it increasingly difficult to finance a house purchase without government help.

So the question is, would you bet against the communist Chinese government and the voracious appetite for real estate of the Chinese?

Bloomberg: Sector Focus - REITs

AIM Real Estate Fund Portfolio Manager Paul Curbo discusses opportunities in REITs.

Guest Post: Easy Money Can Lead to Uneasy 1031 Exchanges

(This post was written by James Brennan, a 1031 exchange specialist who helps clients defer capital gains taxes and navigate financial problems. http://www.1031esgroup.com/)

Do you know what a 1031 exchange is? Many investors think they have a handle on it. Unfortunately, often they know enough to appreciate the sentiment but not enough to navigate its many nuances. As investors learn the hard way, one false step can lead to millions of dollars forfeited in failed 1031 exchanges.

For starters, a 1031 exchange is a transaction whereby investors are allowed to sell one property and obtain another without paying capital gains tax. But if you went on that definition alone, you would most likely find yourself in violation of the IRS code, because like all things involved the IRS, there are layers. A key element, often missed, is that to be eligible the property must be held “for productive use” (i.e. not for purposes of reselling). This is catching more people lately because in our current economic climate there is a desire to buy now when prices are low and then quickly flip the property.

A 1031 exchange is not for the “intent to resell”; the IRS has been very clear about this and will invalidate your exchange if it sees that as the true purpose. Furthermore, even if you complete the exchange and then dispose of your new property immediately after, the IRS will retroactively declare your 1031 exchange defunct because the new property was not held for qualified purposes. In short the mantra is intent. There are some common rules of thumb, such as if you hold the property for a year and a day or two tax years you are perceived to be “less aggressive” amongst most groups of tax advisors. But no where does the IRS or congress say this, it is just a general understanding that has evolved. The only way to be “100% buttoned-up” is to contact a CPA or tax attorney before proceeding with any aspect of the exchange and evaluate your unique facts and circumstances. In the end it is important to remember you have to be an investor, not a dealer, to reap the rewards of a 1031 like-kind exchange.

Weekend Roundup

New Rules Ease the Restructuring of CMBS Loans ("WSJ")

What Commercial Real-Estate Threat? The Recovery has Begun ("Deal Journal")

Raft of IPOs target stressed commercial real estate ("Market Watch")

Investors Expect Bank Woes May Finally Jump-Start Distressed Buying Opportunities ("CoStar")

Buyout Fund Contemplates a REIT Turn ("WSJ")

Vacancies Raise Risks and Lower Value for Landlords ("NYT")

Corus Bank Closure Could Help Establish Bottom for Condo Values ("CoStar")

Office Fundamentals Fall Quicker Than Expected, Says Foresight Analytics ("NREI")

The Irony of the Stuy Town Tenant Suite ("Commercial Observer")

Shopping Center Execs Say Holding Onto Current Tenants is Top Leasing Strategy ("CoStar")

Bloomberg Interview with Simon Property Group CEO David Simon

Quick Thought on Corus Bank Failture

FDIC seized Chicago based Corus Bank on Friday. This shouldn't come as a surprise as Corus Bank's troubles started early 2008. Some in the media believe this latest bank failure is a sign that small and midsize lenders will face another round of pain due to commercial real estate loan losses:

Corus's failure is the latest sign that banks, particularly small and midsize regional lenders, face a new round of pain beyond deteriorating home mortgages. Construction loans accounted for 88% of Corus's outstanding loans at the end of the first quarter, the largest share among any U.S. bank with more than $100 million in loans, according to Foresight Analytics.

Other commercial real-estate sectors are also beginning to get clobbered by the recession as evidenced by the bankruptcy filings by General Growth Properties Inc. and Extended Stay Hotels. Commercial real-estate loans could trigger an additional $100 billion in losses at more than 900 small and midsize banks if the economy deteriorates further, according to an analysis by The Wall Street Journal conducted earlier this year.

I'm not so sure. The Banks, large or small, will no doubt have more loan losses related to commercial relate. But, to me, the Corus Bank failure is still related to housing. Corus Bank focused almost exclusively on condo projects. 88% of its loans are construction loans(to home/condo builders), and most are on condo projects in cities such as Miami, Las Vegas and Atlanta.

Also, this quote from BlackRock's CEO Larry Fink caught my eye:

In terms of commercial real estate, bubbles generally blow up because people are not paying attention to the problem. There is no one who's not paying attention to commercial real estate. So I don't think it will be the cause for another dip in the economy.

Larry Fink is a pretty smart guy, some would say he is Wall Street's new king.

How a Construction Crane is Erected

Amazing video.



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Quote of The Day

“I have a direct way of speaking. What I do is tend to lay out everything; I tend to tell people what I’m going to do and how I’m going to do it and what is success for us and what’s not. ….without being too parochial about it, I think Aussies are more direct. I find, having been here for 22 years, in this culture directness is well received but not practiced very much. It might not be just cultural, it might be just me. I think Americans are very verbal and Aussies are more circumspect and that can come across as being clearer. It can also come across as abrupt and cold. Some people find me to be abrupt and cold. That’s just my personal style.”

James Gorman, Morgan Stanley New CEO.

People Of Walmart

Thanks Counter Culture, this new blog cracks me up!

The World's Biggest Real Estate Deal Needs Restructuring

The largest real estate deal in American history - the $5.4 billion sale of MetLife's Stuyvesant Town residential complex to Tishman Speyer/Blackrock, definitely requires restructuring, according to Rob Speyer, co-chief executive of Tishman Speyer Properties. The deal has also become another sore spot for Calpers, the nation's largest pension fund. The asset is projected to run out of cash reserve by the end of the year, while the partnership is tied up in a legal batter in New York, attempting to overturn a lower court decision that could force them to pay hundreds of millions of dollars in rent rebates to thousands of tenants. Not to mention the fact that the property is valued at only $2.13 billion by Realpoint, a credit rating agency. From NYT:

Rob Speyer, who is co-chief executive of Tishman Speyer Properties with his father, Jerry, acknowledged the problem, saying that it went beyond the need for a cash infusion from the partners and their investors, which include Calpers, the giant California pension fund that is the nation’s largest, as well as other pension funds.

“The asset is going to require a restructuring,” he said. “Once the court case is resolved, we’ll speak to our debt holders as well as our fellow equity investors.”

Beige Book: Commercial Real Estate Weak

From FRB:

Reports on commercial real estate markets indicated that demand for space
remained weak and that construction continued to decline in all Districts. Atlanta,
Philadelphia, Richmond, and San Francisco reported that vacancy rates increased, while rates held steady in the Boston and Kansas City Districts and were mixed in New York. Boston, Dallas, Kansas City, Philadelphia, and Richmond commented that the demand for space remained weak. Commercial rents declined according to Boston, Chicago, New York, Philadelphia, and Richmond. Rent concessions were reported in the Richmond and San Francisco markets, and Richmond noted that some landlords had postponed property improvements in an effort to conserve cash. Construction remained at very low levels, with modest improvements noted in public construction in the Chicago, Cleveland, and Minneapolis Districts.

Bloomberg: Commercial Mortgage Defaults To Rise

The Missing Lehman Lesson

As the one year anniversary of Lehman Brothers' bankruptcy filing approaches, Bloomberg has done an excellent piece looking at the missing lesson of the Lehman bankruptcy: a failure to understand the importance of commercial paper and how that market would be affected by the collapse of Lehman. Some real estate projects were put on hold and workers were not paid:

Real estate projects whose funding relied on Lehman’s ability to sell commercial paper came to a halt.

On the otherwise uninhabited Atlantic Ocean island of West Caicos, work stopped in October on the Molasses Reef Ritz- Carlton Hotel and Residences, where cottages were priced at $6.5 million. About 400 Chinese employees of an Israeli construction firm, Ashtrom Properties Ltd., didn’t get paid, according to Jonathan Siegel, New York-based managing director of the project for Logwood Hotel Development Co. Some of them protested, surrounding the temporary housing occupied by their supervisors, preventing them from leaving until they received their money.