Commercial property.

[Guest]

With articles like this forecasting a 40% drop in commercial property values no wonder Bankers are very nervous of anyone dealing in comercial property investment and developement at the moment.  This might partially explain why max isn't happy at the moment.


The total collapse of the Australian listed property trust (LPT) sector seems to have slipped under the radar of most market commentators. You need to remember that Australian LPTs are still subject to a shorting ban, but that hasn't stopped the sector falling to a combined market capitalisation of just $37 billion, of which more than half is Westfield (WDC) at $22 billion.

The amount of money lost in the Australian LPT sector by investors who thought they were seeking defensive distribution streams is truly beyond belief. Unfortunately many, many retirees have been hurt badly by the collapse of the LPT sector, with most believing their investments were low-risk. Many even geared into the already geared vehicles. This was a popular strategy in the financial adviser community. The 20-year chart below of the LPT index (XPJ) confirms 20 years of gains have been obliterated. From peak to today the index has lost $120 billion in value.

So what is the obliteration of LPT equity values attempting to tell me? What are the huge discounts to the latest published net tangible asset values telling me?

First, they are telling me that commercial property prices will correct by about 40% in Australia. There is no doubt Australia is not immune to the global collapse in commercial property prices. Second, it is telling me that funding for commercial property syndicates will be both difficult to source and higher in price. And, third, that Australian banks and insurers haven't taken the hit on commercial property valuations yet.

I just don't think Australian banks are taking enough notice of the collapsing Australian real estate investment trust (REIT) sector. Surely it is a very concerning signal for their unlisted commercial property lending books?

CommBank chief executive Ralph Norris says $26 billion of the REIT financing over the next 24 months or so was from foreign banks who didn't want to be there. Just as we have seen in the mining sector, when the foreign banks run for the exit the funding gap struggles to be filled. The next stage is then we move to foreign government funding or asset fire sales.

In the Australian commercial property sector, I fail to see the Chinese government turning up to fill the funding gap as it has in resources. We all get why the Chinese want to fund iron ore investments, but they don't need a third-tier office building in North Sydney.

The dam wall is about to crack in Australian commercial property. The LPT sector is telling you it's coming. While the Australian banks have attempted to put off the day of reckoning in commercial property by holding together in the syndicates they control, the missing $22 billion of funding the sector will require over the next three years, on top of the Australian banks getting tougher on their $46 billion, will see plenty of forced asset sales into a very weak market.

I suspect the “real” loan to valuation ratios of bank commercial property lending portfolios will be quite different to what they think they are as this unfolds over the next six months and that worries me from a bank equity perspective. It concerns me that for some property syndicates, instead of net tangible assets, NTA will stand for “No Tangible Assets”.

There are cashed-up property players out there (some foreign); but they haven't fired a shot yet and are waiting for the beginning of forced sales at significantly higher yields. They are also waiting for the Australian dollar to fall further. Again, as in all industries, the strong are about to take from the weak and those who financed the weak.

The one question the market can't answer is whether Westfield is among the strong or the weak. It concerns the market that the Lowys supported neither their own recent placement nor the dividend reinvestment plan. That means the Lowys were happy to be diluted twice and didn't reinvest a single cent in their stock at these low prices. I suspect the market will want to know a reason for that decision before revisiting the stock. From a pure trading/liquidity perspective Westfield remains the only stock that dedicated LPT funds can actually sell in scale. That proves the market adage that “even the pretty girls get hurt in the bus crash”.

I've more to say on Westfield later, but make no mistake, the LPT bus has crashed and the consequences are widespread. Get ready for some nasty commercial property headlines and further write-downs from Australian banks and insurers (investment carrying values) over the next 12 months. Note that UK insurers were again pummelled on these concerns this week (Aviva down 5.5%, Friends Provident down 9.8%, L&G down 3.8% and Prudential down 7.6% in a single session) and I can't see how Australian insurers avoid similar issues.

However, some very cheap direct commercial property is coming and we must not forget to buy top-tier assets from forced sellers at appropriate risk-adjusted yields/cap rates. It might be time to set up a property trust from scratch …

By Charlie Aitken
February 27, 2009

 

[Fluffy]

bloody Rudd, what a wanker doing this.

 

[PONTIAN SEA EAGLE]

Commercial property has taken a nose dive ever since the GST was introduced.

 

[ManlyBacker]

Pub valuations are sinking faster than a Cliffy schooner. The US Casino index has fallen 86% and it will happen here. THe write-downs in commercial valuations are coming through during this reporting season and 40% is on the mark. Expect it to tank further. Those that haven't written them down are getting a 'please explain' from ASIC.

This is all bad news for property developers like our saviour. Loan interest rates must be exhorbitant in this climate, and that would be from the dubious sources as none of the Big 4 are willing to put their hands in their pockets.

On Westfield I thought the Lowy's weren't allowed to take part. In general I think the real value write-downs are yet to come as the boards are too scared to admit to investors just how far they have fallen.

 

[Guest]

bloody Rudd, what a wanker doing this.

No-one is blaming Rudd for this.  It is simply a repeat of the eighties and early nineties when commercial property crashed as a result of recession. 

Max is heavily into organising sydicates of investors to buy commercial property and he will be effected by this.  Not sure how hard but it will no doubt be difficult for him. 

Everyone is still blaming Howard for this not Rudd.

 

[ManlyBacker]

I hate to continue being the messenger of doom, but the situation of Valad shows how absolutely drastic the commercial property sector can/has become.

Valad loses $821m but reaches deal with its bankers
SMH Carolyn Cummins Commercial Property Editor
March 2, 2009

VALAD Property delivered its half-year results just before the close of the stock exchange reporting deadline late on Friday, reporting a loss of $821 million for the December 2008 half, and confirming the group secured an 11th-hour deal with its bankers.

After excluding a number of asset write-downs totalling $469 million, including one of $315 million on its intangible assets and a $68 million loss on its derivative positions, the group reported a profit of $14 million. For the same time last year the group reported a profit of $21.1 million.

No interim dividend was paid for the December 2008 period, and no earnings guidance was provided for the full year.

Because of the late filing of the results last week Valad is holding an investor briefing today.

Analysts say the group needs to boost its balance sheet significantly to regain market confidence. One analyst said the new debt deal was a step in the right direction.

Valad was one of the many trusts that headed overseas in the halcyon days of 2006 and 2007 with a $2 billion deal with the commercial property group Scarborough. Its securities were trading at close to $4.50 at the time. After hitting a low of 3.2c on Friday, the group revealed it had been able to come to an agreement with its financiers, some of whom had called in the company administrator KordaMentha to advise on the deal.

Under the latest bank deal, Valad has extended its covenants until September 2011 on an Asia-Pacific security, received an immediate reduction in drawn debt of $121 million, and given the banks' security pool a further $79 million of properties.

In the report it shows the group's Valad Corporate Services took a $324 million hit on its exposure to troubled loans, and the interest in the British Crownstone Investments was written down by $181 million to now stand at $102 million. A deal is still being worked on to sell a further stake in Valad to the British Scarborough group and its director Kevin McCabe. If approved by Valad investors, Mr McCabe, who is a Valad director, will hold a 19.9 per cent interest.

Valad's managing director, Peter Hurley, said the deal was tough to negotiate but he was happy the banks had approved and given the group some "covenant headroom".

Mr Hurley said 2009 would be a year of transition for the group, but that conditions remained too uncertain in the real estate investment trust sector to give any full-year earnings guidance.

Mr Hurley said that to help put Valad back on track senior staff had taken a pay cut, and that 25 per cent of staff had been sacked. That should generate about $30 million in savings, he said.

 

[Guest]

My neighbour works for Valad,  He has just been transferred to their Uk oeprations for two years.  Sounds like a lot of hard work as the Uk market is a lot worse than ours.