Sales of existing homes drop in March

(NEW YORK) Sales of US previously-owned homes fell in March after jumping a month earlier by the most in more than five years, indicating the market will remain depressed for much of the year.

Purchases decreased 3 per cent to an annual rate of 4.57 million, lower than forecast, from 4.71 million in February, the National Association of Realtors said yesterday in Washington. The median price slumped 12 per cent from a year ago and distressed properties accounted for about 50 per cent of all sales.

Record-low mortgage rates and a foreclosure-driven plunge in prices are making houses more affordable, helping the market stabilise following the biggest slump since the Great Depression. Even so, mounting job losses dim prospects for an immediate recovery.

‘This fits with an idea of stabilisation of housing demand,’ said Jonathan Basile, an economist at Credit Suisse Holdings Inc in new York. ‘We’ve seen housing affordability go up across the country. The bad news has been diminishing.’

Shares of the largest homebuilders were down following the report, while stocks overall were little changed.

Another report showed the number of Americans filing first-time claims for unemployment insurance rose by 27,000 people last week to 640,000 people as forecast, while total benefit rolls reached a record, indicating the labour market continues to deteriorate.

Economists forecast resales would fall to a 4.65 million annual rate, according to the median of 69 projections in a Bloomberg News survey. Estimates ranged from rates of 4.37 million to 4.9 million.

Last month’s sales pace was still higher than the decade-low 4.49 million reached in January.
Purchases were down 7.1 per cent compared with a year earlier.

The number of houses on the market dropped 1.6 per cent to 3.74 million. At the current sales pace, it would take 9.8 months to sell those homes, up from 9.7 months in February. The agents’ group has said that a five to six months’ supply is consistent with a stable market. — Bloomberg

Source: Business Times, 24 April 2009

Property issues hog spotlight

THE large capitalised property counters put in a good showing last week, undeterred by the news that home prices here had shrank 14 per cent in the first quarter of this year.

News that pending home sales in the United States had risen while home prices in Britain rose last month for the first time since October 2007 gave local property developers a fillip.
CapitaLand was up 11.6 per cent in just a week, rising from $2.42 to $2.70. City Developments climbed 12.6 per cent in the space of a week.

These property counters outperformed the benchmark Straits Times Index, which rose by only 4.3 per cent over the same period.

One call warrant issued by Macquarie Securities on CapitaLand would have given the holder a whopping return of 53.8 per cent. Expiring next month, with an exercise price of $2.816 and a conversion ratio of 1,000 shares to 1,657 warrants, the CapitaLand warrant rose 3.5 cents to 10 cents. But only 10,000 units changed hands for this particular warrant.

An active warrant which offered a conversion ratio of 1,000 shares to 1,657 warrants and an exercise price of $2.319 was 3.5 cents higher at 29 cents. Nearly six million units were traded.

Keppel Corp was another counter on the rise. It rose 9 per cent in just a week, closing at $5.75 on Friday. A call warrant issued by Macquarie rose 23 per cent or 1.5 cents to eight cents. About 50,000 units were traded. The warrant expires in October, has an exercise price of $6.80 and a conversion ratio of one share to 12 warrants.

A call warrant lets an investor buy into a stock or index at a preset price over three to nine months. A put warrant lets an investor sell the stock or index at a preset price.

LEE SU SHYAN

Source: Straits Times, 6 April 2009

US mortgage rates dip to record low

NEW YORK: US Federal Reserve chairman Ben Bernanke is delivering what he promised five months ago: record-low mortgage rates and a refinancing boom that is putting cash in US consumers’ pockets by buying up mortgage securities.

Fixed 30-year mortgage rates fell to a record low for the second consecutive week last week, hitting 4.78 per cent, Freddie Mac said on Thursday.

The rates are the lowest in records dating to 1971, and come after Mr Bernanke told Congress last November that helping the most creditworthy borrowers was essential to reviving the economy.

The Fed’s effort to bring down fixed rates may give consumers as much as US$25 billion (S$38 billion), said Mr Mark Zandi, chief economist of Moody’s Economy.com.

‘It certainly gives further fuel to consumer spending,’ said Professor Nicolas Retsinas, director of Harvard University’s Joint Centre for Housing Studies in Cambridge, Massachusetts.

The extra cash may help boost first- quarter consumer spending by 1 to 1.5 per cent, said Mr Barton Biggs, managing partner at hedge fund Traxis Partners. Consumer spending accounts for about two-thirds of the US economy.

Mortgage applications in the United States rose for the fourth straight week last week as a decline in borrowing costs spurred home owners to refinance, while purchases of new houses unexpectedly rose in February.

In November, the Fed said it would buy up to US$500 billion in home-loan securities, causing the biggest one-day drop in mortgage rates in at least seven years, according to Bankrate.com. On March 18, the central bank almost tripled the size of the programme to up to US$1.25 trillion in purchases this year. The intent is to cut rates and make real estate financing easier to get, the Fed said.

The plan to buy mortgage bonds this year is succeeding where US$11.6 trillion of government lending, spending and guarantees so far has failed. ‘This has been the most successful effort, at least so far in this crisis, to shore up the economy,’ said Mr Zandi.

Mr Bernanke’s mortgage purchase programme may help curb a recession that is in its second year and being driven by the highest jobless rate in a quarter of a century and shrinking household wealth.

‘If you throw enough money at one credit market, you will bring down the price,’ said Dr Gerald O’Driscoll, a senior fellow at the Cato Institute and former vice-president of the Dallas Federal Reserve. ‘They are targeting the mortgage market in an attempt to speed the process of establishing a floor in the price of housing.’

Home owners who refinance with a half-point drop in fixed rates may save US$150 a month on a US$300,000 mortgage, said Mr Stephen Stanley, chief economist at RBS Securities.

Cheaper financing may also spark a turnaround in the housing market. Sales of previously owned homes rose 5.1 per cent to 4.72 million at an annualised pace in February from the prior month as low mortgage rates spurred demand, the National Association of Realtors said this week. Mr Bernanke cited lower mortgage rates in testimony in February as evidence that Fed policies were working, noting rates had fallen ‘nearly 1 percentage point’ since the programme began.

‘We have seen evidence that home sales are bottoming,’ said Mr Jim O’Sullivan, senior economist with UBS Securities, in Stamford, Connecticut.

BLOOMBER

Source: Straits Times, 4 April 2009

Manhattan price slide gives sellers the chills

(NEW YORK) Consider apartment 13C at 730 Park Avenue on Manhattan’s storied ‘Silk Stocking’ district. It has seven rooms, a fireplace, excellent nearby schools – and a price that has been cut 46 per cent.

Price support gone: Big buyers who used to come off Wall St with bonus in hand did not appear this year

The tale of 13C illustrates a role reversal of sorts underway in Manhattan real estate.
Sellers of property have called the shots for years on the 58.8 square kilometre island that is the financial capital of the United States. But now buyers are having their day, according to the first-quarter reports due from major real estate brokerages today.

In the fourth quarter of 2008, for example, resale median prices in Manhattan fell 9.5 per cent for condominiums and 5.2 per cent for co-ops compared with the third quarter of 2008, according to real estate website StreetEasy. com.

This quarter, they declined even more, both compared with the prior year’s first quarter and sequentially, said Sofia Kim, the website’s head of research.

From the market peak between the fourth quarter of 2007 and the first quarter of 2008, listing prices – typically higher than the selling price in a buyers’ market – plunged between 10 and 20 per cent.

‘I still don’t think the market has bottomed out,’ said Ms Kim, who expects prices to decline at least another 10 per cent.

In the first quarter of 2009, the number of Manhattan homes on the market hit 15,460, a 41 per cent increase compared with the first quarter of 2008, according to Street Easy.com data.

The reports are expected to reflect job losses on Wall Street, which have depleted Manhattan’s pool of potential homebuyers, causing uncommon declines in real estate prices.

In February, New York City’s unemployment rate rose 1.2 percentage points to 8.1 per cent from January, the highest level since October 2003, the state Department of Labor said last week.

The reports paint an ugly picture for sellers in the first quarter, when few creditworthy buyers were prepared to step into the market, those privy to the reports said.

‘This is the first quarter that we’re really seeing price drops,’ said Pam Liebman, CEO of the Corcoran Group, the city’s largest real estate brokerage.

‘These days, the buyers are feeling better than the sellers. The last couple of years, it was the other way around,’ Ms Liebman said.

In a market where prices have steadily risen for years, ‘a seller today simply has to be the lowest in their category’, said Brown Harris Stevens broker Elaine Clayman.

‘They have to understand that their apartment could be worth less in a month,’ said Ms Clayman, who has seen rejected buyers return with lower offers, generating ‘tremendous frustration for the seller’. Sellers are struggling to accept this new reality, said appraiser Jonathan Miller, author of brokerage Prudential Douglas Elliman’s market report.

Mr Miller said that while sellers no longer put their prices at 10 per cent above their building’s peak price, they are still reluctant to price their homes below that peak price.

‘Sellers are still the farthest behind the market I’ve ever seen,’ he said.

Sellers must acknowledge the shrinking of the market in the aftermath of the upheaval on Wall Street, which cost jobs as well as billions of dollars in bonuses that financial services employees might have used to trade up to a new living space, said Paul Herrick, a real estate lawyer. He estimates his business in the first quarter was off 50 per cent compared with last year.

Already in 2008, Wall Street firms slashed bonuses by 44 per cent, cutting the total to US$18.4 billion from US$32.9 billion in 2007, state Comptroller Thomas DiNapoli said in a January report. With intense pressure on banks and other companies getting government bailouts to rein in compensation, that figure could head lower this year.

As a result, Mr Herrick said, bonus buyers have gone missing from the market. ‘The buyer who comes off Wall Street with bonus in hand did not appear this year. Usually, that buyer moves big time into the market by the second week of January.’ – Reuters

Source: Business Times, 2 Apr 2009

John Hancock Tower may be sold for half its 2006 price

Boston skyscraper goes on the block today; it was bought for US$1.3b in 2006
(SEATTLE) Boston’s John Hancock Tower, the tallest skyscraper in New England, may be sold to lenders led by Normandy Real Estate Partners for about half the US$1.3 billion paid in 2006 by Broadway Partners, which defaulted on its loan.

The John Hancock Tower: Probably worth less than US$750 million, according to a New York-based real estate research firm

The building goes on the block today in New York under state rules that govern mezzanine loan foreclosures. Mezzanine loans are intended to fill the gap between a first mortgage and the borrower’s cash down payment.

While mezzanine lenders seeking to foreclose must hold an auction of ownership interests, they start out ahead of other bidders because they are credited the unpaid balance of their loan as part of their bid. Normandy controls about US$472 million of loans on the Hancock Tower, according to people familiar with the financing who asked to remain anonymous.

‘By the time the process gets to a public auction, the most likely winner will be the senior-most foreclosing mezzanine lender,’ said David Furman, a partner at law firm Gibson Dunn & Crutcher. ‘It is allowed to credit bid the amount of its loan; therefore, it can usually outbid everyone else.’

Normandy, based in Morristown, New Jersey, was founded in 2002 by Finn Wentworth and David Welsh, who worked together at Gale & Wentworth, a real estate investment and development firm.
A spokesman for Normandy said the firm does not comment on ‘transactions in process’.

Spokesmen for Broadway and Green Loan Services LLC, the unit of SL Green Realty Corp hired by the mezzanine lenders to oversee the loan workout, declined to comment.

The Hancock Tower, at 200 Clarendon Street in Boston’s Back Bay neighbourhood, is probably worth less than US$750 million, according to Reis Inc, a New York-based real estate research firm.
Occupancy and rents have fallen since Broadway bought the 1.76 million square foot building in December 2006, said Reis.

The auction might help reveal how far commercial property prices have fallen. ‘This sale will be a test of where values are in the office market,’ said Michael Knott, a senior analyst at real estate research firm Green Street Advisors Inc.

Mr Knott said Normandy’s desire to salvage its investment might lead to a higher bid than what a new buyer would be willing to pay. ‘This is one of the most recognisable buildings in one of the leading markets in the country,’ he said.

Also included in today’s auction are the eight-storey garage at 100 Clarendon Street adjacent to the Hancock Tower and 10 Universal City Plaza, a 35-storey building in Los Angeles’s San Fernando Valley that’s located next to the Universal Studios Hollywood theme park.

After Broadway defaulted on mezzanine loans secured by stakes in both properties in January, the mezzanine lenders hired Green Loan Services to oversee the workout and Green hired property broker Eastdil Secured LLC to conduct today’s auction.

It wasn’t supposed to end this way.

The Hancock Tower, a 60-storey glass building designed in the 1970s by architects IM Pei and Henry Cobb, was the crown jewel in Broadway’s US$3.3 billion purchase of 10 buildings from Boston-based Beacon Capital Partners LLC in December 2006. Broadway has acquired US$15
billion of office buildings since it was founded in 2000 by chief executive Scott Lawlor.

When Broadway bought the Hancock Tower, debt financing was readily available and office landlords were increasing rents and filling all the available space. The Hancock building was about 99 per cent occupied when Broadway bought it. At the time, some buyers even counted impending vacancies as a plus because it meant they might be able to charge higher rents when they signed new tenants or renewed leases.

Broadway’s stakes in the Hancock Tower and 10 Universal City Plaza are part of the collateral for US$723.8 million in mezzanine debt originally underwritten by Greenwich Capital, a unit of Royal Bank of Scotland Group, and Lehman Brothers Holdings.

The Hancock Tower also has a first mortgage with an original face amount of US$640.5 million and 10 UCP has a first mortgage with an original face amount of US$294.8 million.

Unlike a mortgage, where the bank has a lien on the actual property, a mezzanine loan is secured by a pledge of equity ownership in the borrowing entity, usually a limited liability company; that pledge is akin to an indirect claim on the building.

Mezzanine loans also tend to have shorter terms than first mortgages.

Things went awry for Broadway soon after the purchase. The US real estate market peaked in early 2007 and lending dried up as defaults in the residential sub-prime mortgage market spread to commercial real estate.

When the US$723.8 million of mezzanine loans came due in January last year, Broadway paid a fee to extend the repayment deadline. As the credit crisis deepened, the firm put assets up for sale to raise cash and cut jobs.

By the time the last extensions expired in January this year, the firm had nowhere to look for refinancing because loss-ridden banks had stopped making loans pending a federal bailout of the financial services industry. Broadway defaulted on the mezzanine loans, paving the way for today’s foreclosure auction. – Bloomberg

Source: Business Times, 31 Mar 2009

Housing market jumps in Feb

(WASHINGTON) Sales of existing homes rose from January to February in an unexpected boost for the slumping US housing market as buyers took advantage of deep discounts on foreclosures.

The National Association of Realtors said yesterday that sales of existing homes grew 5.1 per cent to an annual rate of 4.72 million last month, from 4.49 million units in January. It was the largest sales jump since July 2003.

Sales had been expected to fall to an annual pace of 4.45 million units, according to Thomson Reuters.

The median sales price plunged to US$165,400, down 15.5 per cent from US$195,800 a year earlier. That was the second-largest drop on record.

February’s median sales price was up slightly from January, which recorded the lowest median price since September 2002. Prices are down about 28 per cent from their peak in July 2006.

In contrast with the housing boom, when buyers took out ever-riskier loans and maxed out their home equity lines, ‘homebuyers are not overstretching’, said Lawrence Yun, the Realtors’ chief economist. ‘They want to stay within their budget.’

By summertime, sales are expected to get a boost from a US$8,000 tax credit for new homebuyers included in the economic stimulus package signed by President Barack Obama last month.

The number of unsold homes on the market last month rose 5.2 per cent to 3.8 million, a typical increase for the winter months. At February’s sales pace, it would take 9.7 months to rid the market of all of those properties, unchanged from a month earlier.

The bursting of the US housing bubble has caused foreclosures to swamp the market – especially in particularly distressed states like California, Florida, Nevada and Arizona.

About 45 per cent of sales nationwide are foreclosures or other distressed property sales, according to the Realtors group. Those properties typically sell for about 20 per cent less than non-distressed homes.

That’s great news for buyers, who are paying the most attractive prices in years. Plus, interest rates have sunk to historic lows. — AP

Source: Business Times, 24 Mar 2009

Worse in store for US commercial property

(NEW YORK) The US commercial real estate market is bad and investors expect it to get a whole lot worse, according to a closely followed survey by PricewaterhouseCoopers.

‘As investors painfully watch the value of their assets decline, many feel troubled knowing that the ills of the US economic recession have yet to fully impact the commercial real estate industry,’ starts the first- quarter Korpacz Real Estate Investor Survey of more than 100 investors from real estate investment trusts, pension funds, private equity firms and insurance and mortgage firms.

Many investors are struggling with ways to preserve the value of their investments and maintain ownership in the wake of restricted debt sources, declining tenant demand, and falling values, the survey said.

Investors do not expect the commercial real estate sector to rebound until well into 2010 at the earliest.

‘Investors are not expecting this recovery, when it does happen, to be a sharp recovery where it hits bottom and bounces up,’ said Susan Smith, a director at PricewaterhouseCoopers in the real estate group and the survey’s editor. ‘It’s going to be a very slow sluggish recovery,’ she said.
‘There are just too many things right now that are impacting the industry to make investors very confident about what’s going on,’ she said.

Some property owners are lowering rental rates and increasing concessions, which results in lower revenue.

Compared to a year ago, the average amount of free rent landlords are offering has increased to six month in several major office markets, such as Boston, where it rose from 2.15 months; Manhattan, where it grew from 41/2 months and San Francisco, where it rose from 31/2 months.

One investor in the survey suggested ‘making the best deal you can today because tomorrow’s deal will be worse.’ Investors believe that the overall cap rates, or returns, for US commercial real estate over the next six months will rise by an average 0.47 percentage points from 7.49 per cent in the first quarter 2009, the survey said. When cap rates rise, prices fall.

In the retail real estate arena of malls and shopping centres, investors expect power centres, home of the big box stores, to lose value by the greatest amount, with cap rates rising by an average of 0.744 percentage points from 7.63 per cent, according to the survey. They see cap rates for regional malls rising 0.65 percentage points.

Investors expect rent and occupancy for retail properties to continue to decline in 2009, the survey said. Last year, store closings rose 50.1 per cent to 6,913 and forecasts call for more than 8,000 store closings in 2009, according to the survey.

Most investors said they expect the eroding fundamentals to press values down by 10 per cent to 26 per cent from the 2007 peak, with the most pessimistic investors seeing declines of about 40 per cent, the survey said. – Reuters

Source: Business Times, 19 Mar 2009

Surprise rise for housing starts in Feb

Work begins on 583,000 homes, a 22% rise from Jan

(WASHINGTON) Housing starts in the US unexpectedly snapped the longest streak of declines in 18 years in February, adding to signs that the pace of the economy’s decline may be easing.

Work began on 583,000 homes at an annual rate, a 22 per cent rise from January, the Commerce Department said in Washington yesterday. The jump was influenced by warmer weather and an 82 per cent surge in starts on condominiums, apartments and townhouses that’s unlikely to be sustained, analysts said.

While the glut of unsold properties on the market means the housing industry’s recession will probably continue for some time, economists said yesterday’s report indicates the worst of the contraction may have passed. Retail sales figures for February last week also indicated a slower rate of decline.

‘You get the sense from a lot of the data coming out now that we’re beginning to get to a bottom,’ Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts, said in an interview with Bloomberg Television. ‘We’re not quite there yet.’

A separate report showed producer prices rose 0.1 per cent in February, less than the 0.8 per cent gain in the previous month. On a year-on-year basis, wholesale prices fell 1.3 per cent, with a 4 per cent increase after stripping out food and energy costs.

Building permits, a sign of future construction, rose less than starts, indicating construction may again slow. Developers are still contending with record foreclosures that depress prices and profits, and put pressure on the Federal Reserve, which was meeting yesterday and also today, and the Obama administration to solve the credit crisis.

Starts were projected to fall to a 450,000 annual pace, according to the median forecast of 71 economists surveyed by Bloomberg News. Estimates ranged from 400,000 to 500,000. January’s starts were revised up to 477,000 from a previously estimated 466,000.

Permits, a sign of future construction, increased 3 per cent to a 547,000 annual pace. They were forecast to drop to a 500,000 annual rate, according to the survey median.

Construction of single-family homes climbed 1.1 per cent to a 357,000 rate, yesterday’s report showed.

Work on multifamily homes, such as townhouses and apartment buildings, surged to a 226,000 pace from 124,000 in January. — Bloomberg

Source: Business Times, 18 Mar 2009

Housing market’s upside: affordability

This could stimulate demand when economy stabilises

(NEW YORK) Houses in the United States are now more affordable than at any time in the last 40 years when compared with personal income.

Only a couple of years ago, home prices rose to clearly unsustainable multiples of income, and the abrupt change could hold out hope for a revival of the housing market.

In the summer of 2005, when funny-money mortgages were readily available and helping to drive up home prices, the national median sales price of a home was almost eight times as much as the average per capita after-tax income of Americans.

But by this January, with incomes up and home prices down sharply, that multiple had fallen to less than five.

That may be little comfort for many homeowners who owe more than their homes are now worth, but it does indicate that home prices have fallen far enough, at least in many areas, to make them affordable.

‘You have a big debt overhang problem, but you don’t have a house price problem anymore,’ said Robert J Barbera, the chief economist of ITG, an advisory firm.

Home prices vary widely from region to region, and people in areas like New York or Los Angeles can only dream of finding an acceptable home for US$169,900, which the National Association of Realtors says was the median sales price of previously owned homes sold in January.

That figure was down from a peak of US$230,900 in July 2006. It is not clear that prices have declined enough to make houses broadly affordable in some regions.

National median prices can be misleading, particularly because more or fewer sales may be coming from high-cost or low-cost areas.

Moreover, the volume of home sales has plunged. Many recent sales involved homes that were in or close to foreclosure, and may have been conducted at prices lower than the asking price for other homes in the area.

But it is also possible that the decline in the median price may understate the devastation that has befallen the housing market in some areas. In December, the latest figure available, the S&P/Case-Shiller composite home price index for the 20 regions was off 27 per cent from July 2006.

The personal income figures may also be high, since they are affected by government transfer payments and include significant increases in Medicaid and unemployment insurance payments. But the trend is the same even with transfer payments eliminated from the calculation.

Pressures are still forcing home prices down, including the difficulty of obtaining mortgages for prospective buyers who cannot meet the standards set by Fannie Mae and Freddie Mac, the government-controlled agencies that finance the bulk of new home loans.

In addition, there was a lot of overbuilding in many areas, and even though construction has plunged, the inventory of unsold homes has stayed stubbornly high. Rising unemployment may discourage some who could buy from doing so.

But at least by one measure, home prices no longer appear to be high by historic standards. That fact could help to stimulate demand, if not immediately, then at least when the economy appears to stabilise. — NYT

Source: Business Times, 10 Mar 2009

In the new US property market, old guys are hot

(NEW YORK) Ted Leary’s retirement was short-lived. After saying good-bye to real estate in 2005, he headed for the golf course, but the collapsing commercial property market interrupted his game.

A career that began in the 1970s with the rehabilitation of soured real estate investments had come full circle. ‘Suddenly, at the tender age of 64, people are calling me because there aren’t many workout people around,’ he said, referring to the art of solving problems linked to troubled real estate.

As more deals run into trouble, grizzled veterans with a broad range of knowledge in finance, law, property management and relationship management – along with keen negotiation skills – will be in demand.

‘You sort of put that whole mix together, you’ve got yourself someone that’s going to be sitting pretty in terms of being able to step into what are going to be increasingly difficult times,’ said Anthony LoPinto, chief executive of real estate executive search firm Equinox Partners.

Mr Leary learned workouts during the 1970s real estate bust.

His firm, Crosswater Realty Advisors, counts Victor Palmieri, one of the first US turnaround specialists, as one of its senior advisers. The firm represents large institutional investors at odds with pension fund advisers, who derive fees from the value of assets that are now declining rapidly.
All of the firm’s senior board members, except for one, are over 60.

‘I call it the senior adviser group because at least a couple of parts of your body have to be sagging,’ Mr Leary said.

US commercial real estate values were on a steady ascent in the 15 years to their peak in 2007.
‘We’ve had a whole generation of people in our business that have never seen anything but numbers that get better,’ Mr Leary said.

But the era of the high- leverage deal ended abruptly and debt financing, the life-blood of the industry, has slowed to a trickle. The sector is in a steep downturn, with sales drying up and values falling.

More than US$737.4 billion in mortgages are expected to come due in the next five years, according to the Mortgage Bankers Association. Meanwhile, US property values are likely to have fallen roughly one-third from the peak levels of 2007, according to Prudential Real Estate Investors, more evidence that many borrowers may not be able to repay old mortgages with new ones.

That means the sector will need people with experience in workouts – the process of financially and legally solving problems related to broken loans, orphaned properties, disgusted investors and byzantine debt structures – all done within the context of an overall economic mess.

‘The word workout comes from ‘we have a problem, we have to work it out,’ said John Peters, principle of real estate recruitment firm Peters & Associates.

Banks, financial firms, investor groups and special servicers, which oversee distressed loans supplying cash to pools that pay commercial mortgage-backed securities (CMBS) obligations, are soon expected to hire or contract people to handle what looks to be a barrage of workouts.

Many of the workout professionals will be alumni of the Resolution Trust Corp, which the US government created in 1989 to help sell off distressed real estate held by collapsed banks, thrifts and savings and loans institutions.

But this time the problems will be more complicated and expansive than in the 1990s. Many of the loans and properties are held by companies that are still in business. Extracting the toxic loans without killing the host will be tricky.

‘Back then assets were harvested from a cadaver. In this case, it’s living organism,’ Mr Leary said.
Secondly, more than US$700 billion of senior mortgages outstanding are in CMBS, with US$25 billion maturing in 2009 and US$40 billion to US$50 billion per year between 2010 and 2014, Prudential said.

That means many different investors lay claim to the cash flow of the same mortgage.

‘That’s one of the big differences between this period and the period of the early ’90s,’ Mr LoPinto said. ‘If you look back at it, the exit strategy of the early ’90s debacle was securitisation. This time around, the unwind is going to be the unwind of securitisation.’

The delinquency rate for CMBS loans soared to about 1.63 per cent in February from 0.6 per cent in September, when the credit crisis escalated, according to Deutsche Bank.

It could reach 3.5 per cent by the end of 2009 and 6 per cent by the end of 2010, depending on the credit markets and the economy, said Richard Parkus, Deutsche Bank’s head of CMBS research.
Most of the trouble lies with borrowers who can meet monthly interest payments but can’t refinance the principle because credit markets have shut down.

‘The loans in bank portfolios are a lot worse than the loans in CMBS,’ Mr Parkus said.

Further, there are the mezzanine loans and preferred equity that were used to finance property investments.

‘The complexity of the debt-structure level has gone up 100 degrees,’ said Keith Belcher, JE Robert Cos managing director and head of its CMBS special servicing division.

But younger, less experienced people will still be able to find a place in the workout workforce.
‘They’re not all going to be 50-year-old grey-haired guys,’ Mr Belcher said. ‘They’re going to need a support group that’s going to give some young people, some relatively inexperienced people, help to learn the business along the way.’ – Reuters

Source: Business Times, 10 Mar 2009