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Major Real Estate Collapse In Europe? I've Found The EU Equivalent Of GGP, The Largest Real Estate Failure In US History
I've been renown for calling the housing crash in 2006-7 and the commercial real estate crash in 2007. Late in 2007, I penned a piece titled "The Commercial Real Estate Crash Cometh, and I know who is leading the way!" wherein I made it clear that the CRE party was over, the music stopped and the DJ was packing up. Part and parcel of this general CRE warning (the first of which was the introductory post to BoomBustBlog in September of 2007) was the identification of a particular short candidate whose profligate spending and excessive leverage made for what ultimately was one of our most profitable and thoroughly analyzed shorts - Generally Negative Growth in General Growth Properties - GGP Part II. This company was investment grade (AA) rated and it's common equity traded in the $65 range when I initiated my short position. Roughly twelve months later it filed for bankruptcy. It was the 2nd largest mall REIT in the US and the largest real estate bankruptcy ever although the CFO explicitly called my research and opinion "trash"! The entire story can be followed via: GGP and the type of investigative analysis you will not get from your brokerage house.
Unfortunately, many investors, the equity market, commercial, investment and morgtage banks failed to heed my admonitions. The result of which was the literal pillaging of investors by investment bank private equity and asset management arms. For those who think I'm being rather bombastic and dramatic, reference "Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!", to wit:
Oh, yeah! About them Fees!
Last year I felt compelled to comment on Wall Street private fund fees after getting into a debate with a Morgan Stanley employee about the performance of the CRE funds. He had the nerve to brag about the fact that MS made money despite the fact they lost abuot 2/3rds of thier clients money. I though to myself, "Damn, now that's some bold, hubristic s@$t". So, I decided to attempt to lay it out for everybody in the blog, see "
The example below illustrates the impact of change in the value of real estate investments on the returns of the various stakeholders - lenders, investors (LPs) and fund sponsor (GP), for a real estate fund with an initial investment of $9 billion, 60% leverage and a life of 6 years. The model used to generate this example is freely available for download to prospective Reggie Middleton, LLC clients and BoomBustBlog subscribers by clicking here: Real estate fund illustration. All are invited to run your own scenario analysis using your individual circumstances and metrics.
To depict a varying impact on the potential returns via a change in value of property and operating cash flows in each year, we have constructed three different scenarios. Under our base case assumptions, to emulate the performance of real estate fund floated during the real estate bubble phase, the purchased property records moderate appreciation in the early years, while the middle years witness steep declines (similar to the current CRE price corrections) with little recovery seen in the later years. The following table summarizes the assumptions under the base case.
Under the base case assumptions, the steep price declines not only wipes out the positive returns from the operating cash flows but also shaves off a portion of invested capital resulting in negative cumulated total returns earned for the real estate fund over the life of six years. However, owing to 60% leverage, the capital losses are magnified for the equity investors leading to massive erosion of equity capital. However, it is noteworthy that the returns vary substantially for LPs (contributing 90% of equity) and GP (contributing 10% of equity). It can be observed that the money collected in the form of management fees and acquisition fees more than compensates for the lost capital of the GP, eventually emerging with a net positive cash flow. On the other hand, steep declines in the value of real estate investments strip the LPs (investors) of their capital. The huge difference between the returns of GP and LPs and the factors behind this disconnect reinforces the conflict of interest between the fund managers and the investors in the fund.
Under the base case assumptions, the cumulated return of the fund and LPs is -6.75% and -55.86, respectively while the GP manages a positive return of 17.64%. Under a relatively optimistic case where some mild recovery is assumed in the later years (3% annual increase in year 5 and year 6), LP still loses a over a quarter of its capital invested while GP earns a phenomenal return. Under a relatively adverse case with 10% annual decline in year 5 and year 6, the LP loses most of its capital while GP still manages to breakeven by recovering most of the capital losses from the management and acquisition fees..
Anybody who is wondering who these investors are who are getting shafted should look no further than grandma and her pension fund or your local endowment funds...
What many do not understand is that the real estate crash of the previous decade is far from over, because The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance. This is true for not only the US, but the EU countries as well. Unlike our European and Asian counterparts, many US investors are much too detached to what occurs overses, quite possibly from a hubristic, apathetic or even ignorant stance that what happens over there has littel effect on us stateside. Unfortunately, that is not the case. What do you think, pray tell, happens when the liquidity starved, capital deprived, overleveraged banks faile to roll over all of that underwater Eu mortgage debt?
Slide21
Investors seeking safety in Germany, the UK and France may truly be in for a rude awakening!
Do you really think they will rollover the US debt anyway? How about the result of the guaranteed losses that both bank and investor will take as said debt either fails to get rolled over or is forced to do equity cramdowns? Then think about EU banks going down and American banks being called to pay CDS!
Then think about those sovereign states that truly cannot afford to bail out their banks.
I made this perfectly clear as the keynote speaker at ING's CRE Valuation Confeence in Amsterdam this past April.
Yes, "The Real Estate Recession/Depression is Here, Eurocalypse Style". I have actually discussed the Dutch market in depth at the ING conference and the The Real Estate Recession/Depression is Here, Eurocalypse Style link has all of the videos in their entirety for all who are interested. We have already identified a Dutch real estate short candidate - subscribers (click here to subscribe), please download Northern Europe CRE short candidate #1. This company is suffering from a variety of maladies that, on an individual basis, may not seem that bad but once aggregated put it on the same path that GGP was on. The difference? This is after the so-called economic recovery, in the conservative EU state of the Netherlands, and right before the massive rate storm that will bethe Pan-European Sovereign Debt Crisis that I have warned about since 2009. The result, many properties that will either be difficult or impossible to refinance or roll over. Again, subscribers, reference Dutch REIT Debt Analysis, Blog Subscriber Edition. This is a succinct illustrtion of how this company will not be able to rollover much of its debt, and the absolute lack of recognition of such by the markets. Of interest is the fact that the number 3 short candidate on our short list is over 50% owned by this company (which came in as #!). With friends such as that, who needs enemies!
Yes, this company's share price does not reflect its financial condition. Hedgies, macro speculators, and those looking to generate alpha - this is the opportunity for you!
For those who have not followed my CRE forensic analysis in the past, below is an excerpt of the full analysis that I included in the updated Macerich (a large US developer/REIT) forensic analysis from several years ago. This sampling illustrates the damage done to equity upon the bursting of an credit binging bubble. Click any chart to enlarge (you may need to click the graphic again with your mouse to enlarge further).
image001.pngimage001.png
Notice the loan to value ratios of the properties acquired between 2002 and 2007. What you see is the result of the CMBS bubble, with LTVs as high as 158%. At least 17 of the properties listed above with LTV's above 100% should (and probably will, in due time) be totally written off, for they have significant negative equity. We are talking about wiping out properties with an acquisition cost of nearly $3 BILLION, and we are just getting started for this ia very small sampling of the property analysis. There are dozens of additional properties with LTVs considerably above the high watermark for feasible refinancing, thus implying significant equity infusions needed to rollover debt and/or highly punitive refinancing rates. Now, if you recall my congratulatory post on Goldman Sachs (please see Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off), the WSJ reported that the market will now willingingly refinance mall portfolio properties 50% LTV, considerably down from the 70% LTV level that was seen in the heyday of this Asset Securitization Crisis.
The same is the basic case over in Europe.
Click the following pages to englarge...
Those who wish to download the full article in PDF format can do so here: Reggie Middleton on Stagflation, Sovereign Debt and the Potential for bank Failure at the ING ACADEMY-v2.
As usual, I can be reached via the following (or directly via email), and urge all who rely on the perenially wrong sell side to subscribe to BoomBustBlog:
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Yah it's really a masive fall in US real estate. I affaid that kind of fall could be in Killeen Real Estate
Once a month I’m writing an economic newsletter to inform family, friends and interested clients about the real economic situation, the fraud that caused this crisis and the people who benefit from it.
Often, the GPs are naive, but they are generally not crazy. The GPs are often using someone else's money, ex. pension fund managers, hedge fund advisors and Killeen Real Estate
Very good, Reggie.
As I understand it : NPA= non performing assets; those that are risky. On this basis :
what happened to France's bank NPA's; they are as short as Sarkozy??? I thought french banks were standing tall in terms of risky assets???
Now they look pigmy like in comparison with UK !
Has this been the case from beginning??
Ok thanks god I can actually read one of his articles without all the disconnected paragraphs. Ok let me go read it. Thank you Regie finnally.
Reggie, when should we buy a home in Paris?...in France?
Prices are not down yet, and the euro is still worth more than the USD.
The French prefer real estate to stocks or the banks.
Heres a few clear Data Points.
Irish Stamp duty tax on Property trasactions - 2006 : 2.967 Billion
- 2009 : 346 Million
- 2010 : 198 Million
namawinelake.wordpress.comCarnage
Extremely clear data points; thank you from those of us of an engineering persuasion who believe if you can't measure it, it didn't happen. I just love numbers; the harder the better.
No crisis.
Reggie, hope you covered your GGP short on the day GGP filed for bankruptcy on April 16, 2009. Shares were super cheap that day and I loaded the boat and made a fortune over the next 2 years. Thanks for shorting!
Now were you savvy enough to buy?
Reggie, with all due respect to your usually magnificent data, this is like Chinese arithmetic. Too much data, not a cogent explanation. No disrespect intended of course, it's just that we're all no economic PhD's.
Yes but if he doesnt include all that data how will you know how great he is?
1970's Stagflation Ditto's Reggie!
And this time, we don't have Disco!
"And this time, we don't have Disco!"---there's always something to be thankful for.
Not quite, we have dubstep...
Rap is the new disco
In the immortal words of the Talking Heads,,,
Same as it ever was, same as it ever was....
http://www.marketwatch.com/Story/story/print?guid=1A8F4C50-25CF-11E1-A0B...
http://en.wikipedia.org/wiki/Long_Depression
21st Century Long Depression
Get the axe out for AXA...
Imagine a world where countries and corporations and banks and brokerages are all overleveraged and essentially abandon efforts to pay debts to each other and instead focus on insolvency relief and/or subverting the rule of law as a matter of survival.
We are almost to that point (or rather, we have long passed that point and all that remains is a trigger to destabilize the corrupt system). That trigger won't necessarily be what we think it's going to be, but whatever it is we can be sure it's getting closer by the moment.
The countries that will fare the best will be the ones in good demographic shape (not too old or too young), reasonably industrialized, with quality educational institutions, endowed with natural resources and agriculture (or having plenty available in nearby, friendly hands) and with a good work ethic and democratic politics.
This does not describe a fractured Europe, an aging Japan, a lopsidedly-developed China, a Russia hemmed in by its history, an uneducated Africa or a Middle East in a muddle. It MAY describe India and the Mexamericanada and Australia if we all get our acts together.
Real estate is not the place to be while this is all happening unless it is real estate you personally can occupy and make productive.
50 million Americans on food stamps might disagree...USA is going to explode like Beirut in 1975. 200 million handguns, militarized police, millions of war veterans and many are unemployed and homeless.
Argentina not Beirut. We are a melting pot, not multicultural; and there just isn't room for that kind of sectarian conflict.
Phew! That is an aspect of the European debt crisis that I never thought of. With the sovereign debt issues, I never considered the squeeze that would be put on mortgage availability. The credit crunch could be only the tip of the iceberg. By the "birds of a feather" guilt by association rule, I have to wonder if Europe will have the same level of foreclosure fraud that we have in the U. S. If so, all hands on deck, man the lifeboats.
http://georgesblogforum.wordpress.com/2011/11/02/the-daily-climb-2/
This is data diarrhea
Bill Bonner at the Daily Reckoning web site says the Australia RE Bubble is beginning to pop with increased defaults and much harder to sell houses now.
Another result of gubberment tax credit and EZ Credit with zero down loans, Kanagroo style.
Too early. Wait till the Chinese Ships loaded falls by 15-20% in a ninety day period; then you'll here the big wet splat of the bubble popping.
It is hard to believe given the current news environment-that things could actually be worse than the perpetual alarmist headlines are blaring.
But it seems w both Europe and China that they are worse.
and just for the record, the Japanese nothingness decades were brought about with merely ten times leverage. I remember the articles at the time-thinking how can such a consverative society get so out on the limb-meanwhile the latest levers were 40times and up around the rest of the world.
Actually, in my country there was no news whatsoever about the crisis. It's just nonexistent over here!
It's freaky!
Yeah; it's a strange post. Our mass media doesn't do "negativity" either. Unless you read this blog or one of few others it's just a sunny day in Mr. Rogers neighborhood.
Are you a citizen of La-La Land?
Äh, what????
My brain hurts.
Reggie - Summarize please!
The house of cards that europe is will see some of it's cards fall. It doesn't look good. Now I'm going to drink a beer.
Ah, you lucky bastard; you live where they actually have beer. Rubbing it in, are you?
This article is a mess.