theogt
05-10-2008, 07:44 PM
Real-estate debt market opens up
By LINGLING WEI
THE WALL STREET JOURNAL EUROPE
May 9, 2008
The logjam in the commercial real-estate debt market is beginning to break up, as lenders are relenting and beginning to offer investors the bargains they have been seeking in the sale of billions of dollars of mortgages and securities that have been stuck on bank books.
But the discounts so-called distressed buyers are getting -- ranging from 5% to 20% -- are far from what vulture investors got in the wake of the last major real-estate collapse in the early 1990s. "We're not going to move [commercial real-estate assets] at fire-sale prices," said Lehman Brothers Holdings (http://online.wsj.com/quotes/main.html?type=djn&symbol=leh) Inc.'s finance chief, Erin Callan, during a conference call this year, adding, "We're going to move them at prices that make sense to us."
Part of the reason for the limited discounts is that commercial real estate so far isn't hurting nearly as much this time. Commercial-mortgage prices also are being propped up by competition among the dozens of high-yield funds that have raised billions to take advantage of the turbulence in the commercial real-estate debt market. As a result, many funds may not be able to achieve the kind of low- to midteens returns they are targeting -- especially if they can't borrow money to magnify their returns amid a tight lending environment, according to market participants.
Meanwhile, these trends have caused little relief for capital-starved real-estate owners and developers. Vulture funds are finding it more attractive to invest in debt than in equity, keeping property owners from benefiting in the increased interest in the sector. And lenders, which virtually halted new activity last year, show little sign of easing up on the brakes.
Banks' commercial-debt problems started last summer, when the credit crunch prevented them from packaging and selling some $200 billion in loans on properties such as skyscrapers and shopping malls as commercial mortgage-backed securities, or CMBS. Since then, bargain-hunting investors have been willing to buy the debt stuck on banks' books at fire-sale prices, but banks haven't been willing to unload at that level.
Now, lenders -- under pressure to clean up their balance sheets -- are increasingly selling that debt, both as whole loans and CMBS. Buyers also are coming forward because of growing trading volume of CMBS in the secondary market, driving down the difference in yields between the securities and U.S. Treasurys.
In the past four weeks, banks have been able to go to market with four CMBS issues, with a total balance of $4.9 billion, according to data provider Commercial Real Estate Direct. That represents a marked improvement from early this year, when weeks went by without a deal, but pales in comparison with the same period of last year, when the issuance totaled $78.7 billion.
"It's anticipated that, industrywide, inventory will be way down by the end of the second quarter," said Steve Kantor, co-head of global securities and of alternative investments at Credit Suisse Group (http://online.wsj.com/quotes/main.html?type=djn&symbol=cs).
Among the notable reductions: Lehman Brothers, which had $36.1 billion in commercial mortgages and CMBS as of the end its first quarter ended Feb. 29, sold roughly $5 billion of the debt just in the two weeks following the end of the quarter. Credit Suisse sold roughly $5.5 billion of commercial-property loans and CMBS in the first quarter, which helped cut its inventory by 25% as of March 31. Wachovia (http://online.wsj.com/quotes/main.html?type=djn&symbol=wb) Corp., another big lender, sold $4.2 billion of debt in the quarter, reducing its exposure -- after the effect of offsetting transactions, or hedges -- to $3 billion as of March 31 from $7.6 billion at year's end.
Yet the discounts these lenders are offering are anything but generous. During the real-estate collapse of the early 1990s some commercial debt sold for cents on the dollar.
But at that time, the default rate was more than 20% and distressed funds didn't start buying huge blocks of assets, primarily from the government's Resolution Trust Corp., until more than one year into the crisis.
Today there already are at least 55 active or planned commercial real-estate debt funds seeking to raise $33.8 billion, according to Real Estate Alert, a trade publication. And many have begun to do deals.
For instance, Guggenheim Partners' $1.25 billion real-estate debt fund, raised in December, has so far closed or committed to more than $2 billion of investments.
By LINGLING WEI
THE WALL STREET JOURNAL EUROPE
May 9, 2008
The logjam in the commercial real-estate debt market is beginning to break up, as lenders are relenting and beginning to offer investors the bargains they have been seeking in the sale of billions of dollars of mortgages and securities that have been stuck on bank books.
But the discounts so-called distressed buyers are getting -- ranging from 5% to 20% -- are far from what vulture investors got in the wake of the last major real-estate collapse in the early 1990s. "We're not going to move [commercial real-estate assets] at fire-sale prices," said Lehman Brothers Holdings (http://online.wsj.com/quotes/main.html?type=djn&symbol=leh) Inc.'s finance chief, Erin Callan, during a conference call this year, adding, "We're going to move them at prices that make sense to us."
Part of the reason for the limited discounts is that commercial real estate so far isn't hurting nearly as much this time. Commercial-mortgage prices also are being propped up by competition among the dozens of high-yield funds that have raised billions to take advantage of the turbulence in the commercial real-estate debt market. As a result, many funds may not be able to achieve the kind of low- to midteens returns they are targeting -- especially if they can't borrow money to magnify their returns amid a tight lending environment, according to market participants.
Meanwhile, these trends have caused little relief for capital-starved real-estate owners and developers. Vulture funds are finding it more attractive to invest in debt than in equity, keeping property owners from benefiting in the increased interest in the sector. And lenders, which virtually halted new activity last year, show little sign of easing up on the brakes.
Banks' commercial-debt problems started last summer, when the credit crunch prevented them from packaging and selling some $200 billion in loans on properties such as skyscrapers and shopping malls as commercial mortgage-backed securities, or CMBS. Since then, bargain-hunting investors have been willing to buy the debt stuck on banks' books at fire-sale prices, but banks haven't been willing to unload at that level.
Now, lenders -- under pressure to clean up their balance sheets -- are increasingly selling that debt, both as whole loans and CMBS. Buyers also are coming forward because of growing trading volume of CMBS in the secondary market, driving down the difference in yields between the securities and U.S. Treasurys.
In the past four weeks, banks have been able to go to market with four CMBS issues, with a total balance of $4.9 billion, according to data provider Commercial Real Estate Direct. That represents a marked improvement from early this year, when weeks went by without a deal, but pales in comparison with the same period of last year, when the issuance totaled $78.7 billion.
"It's anticipated that, industrywide, inventory will be way down by the end of the second quarter," said Steve Kantor, co-head of global securities and of alternative investments at Credit Suisse Group (http://online.wsj.com/quotes/main.html?type=djn&symbol=cs).
Among the notable reductions: Lehman Brothers, which had $36.1 billion in commercial mortgages and CMBS as of the end its first quarter ended Feb. 29, sold roughly $5 billion of the debt just in the two weeks following the end of the quarter. Credit Suisse sold roughly $5.5 billion of commercial-property loans and CMBS in the first quarter, which helped cut its inventory by 25% as of March 31. Wachovia (http://online.wsj.com/quotes/main.html?type=djn&symbol=wb) Corp., another big lender, sold $4.2 billion of debt in the quarter, reducing its exposure -- after the effect of offsetting transactions, or hedges -- to $3 billion as of March 31 from $7.6 billion at year's end.
Yet the discounts these lenders are offering are anything but generous. During the real-estate collapse of the early 1990s some commercial debt sold for cents on the dollar.
But at that time, the default rate was more than 20% and distressed funds didn't start buying huge blocks of assets, primarily from the government's Resolution Trust Corp., until more than one year into the crisis.
Today there already are at least 55 active or planned commercial real-estate debt funds seeking to raise $33.8 billion, according to Real Estate Alert, a trade publication. And many have begun to do deals.
For instance, Guggenheim Partners' $1.25 billion real-estate debt fund, raised in December, has so far closed or committed to more than $2 billion of investments.