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McKinsey Study Finds European CRE Financing Industry Was Never Really Profitable
Yet one more nail in the CRE coffin, and another reason why extend and pretend will be with us for years to come, lest investors wake up and find out just how screwed this country's economy really is. In the meantime, IYR is going to the moon. A new McKinsey study looks at the CRE lending industry and finds some very disturbing things. Such as that even in the peak market years of 2006-2007 the European CRE finance industry did not cover its cost of capital!!! One can only imagine what the reality must be like currently in the dead zone that is European Commercial Real Estate financing (and also in those barbaric lands west of the Atlantic). Yet somehow the Euro keeps appreciating every day against the dollar. Let the Kool Aid flow.
More from McKinsey:
“Our research has produced two key findings. First, the industry as a
whole does not return its cost of capital (defined as equity) even in
the best of times, let alone over the business cycle. Put another way,
the “profits” recorded in good times are in fact economic losses to
equity holders; worse, they fail to provide a cushion for the
significant losses that come in industry downturns.”
And with the reading-challenged equivalents across the Atlantic of CIT's deal makers deciding what deals deserve financing, it is no wonder every dollar "invested" into CRE loans is a dollar burned.
"Because of these dynamics, we expect that even after the current crisis
has faded, the CRE finance industry will continue to destroy value."
The McKinsey survey was based on eight large European banks while several
others granted supplementary data. Collectively, McKinsey
estimates that these two groups comprise about 40 percent of the CRE
loans outstanding on balance sheets across Europe. The survey spanned
2006 and 2007, the final two years of the property boom, providing a
clear picture of how the industry performs in good years. God help these banks if the McKinsey study were extended two years past the sunset of the 2007 "best year" for CRE. Of course, the toxic sludge is still on the balance sheets. However, courtesy of even more loose regulatory requirements than in the US, these don't have to be disclosed until the impairment is practically 100% and a 100% loss follows. In other words, a binary environment where everything is either tip top or Armageddon. One hopes the switch to the latter does not occur in our lifetimes.
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its killing time
Errrm, why are they using equity? Isn't the whole point that in many cases (most) there was no equity? Also is 15% not a bit bloody steep?
I guarantee you could look at US residential mortgage lending between 2003 and 2007 and come to the same conclusion that the activity as a whole never earned a dime, all it did was waste resources and reallocate wealth.
Okay, I'm stumped. Why is the cost of equity relevant in telling me why deals that were levered upto the eyeballs weren't a good idea? No-one gives a shit about economic profits, they set out to make money in da mitt and spend it on nice suits and bonuses. See?
Greece can expect no gifts from Europe
After Dubai, will Greece be next? This question is technically a category error, since Dubai World is not a state but a state-owned company. But many investors rightly do not care about the difference. Last week investors started to fret about sovereign default in earnest. So what about Greece?
We were already wondering about a Greek default at the beginning of this year, when eurozone bond spreads suddenly widened. In February Peer Steinbrück, the former German finance minister, abruptly ended the speculation by saying the eurozone would act if someone got into trouble. There was no concrete action plan. No work had been done to amend European treaties. There was no budgetary appropriation. Just a sentence. Investors believed him and all was well – for a while.
The speculation is now back, but there is one difference. The eurozone will not come to the rescue this time, verbally or otherwise, unless Greece meets a number of conditions the European Union is likely to impose in the coming months.
http://www.ft.com/cms/s/0/de16732a-dd14-11de-ad60-00144feabdc0.html
Sorry to admit but I was watching cnbc bout 4am this morning (west coast) and they were talking bout Greece has too much gold to think about a default. Anyone else catch that and wanna comment on it?
I worked at McKinsey and I don't believe a single number or word they put out. It's a bunch of sleep-deprived 20-somethings working frantically to make numerology look like analysis as they work feverishly to meet the capricious demands of mendacious 30-somethings aspiring to become the lazy, venal 40- and 50-somethings who "run" the firm and make up fairy tales for clients.
Fantastic.
And alternatively terrifying.
Leverage amplifies gains, as well as losses. Things look great on the way up.