Wilbur Ross and George Soros are out today calling for crash of commercial real estate.Read more here:
Billionaire investor Wilbur L. Ross Jr., said today the U.S. is in the beginning of a “huge crash in commercial real estate.”
“All of the components of real estate value are going in the wrong direction simultaneously,” said Ross, one of nine money managers participating in a government program to remove toxic assets from bank balance sheets. “Occupancy rates are going down. Rent rates are going down and the capitalization rate — the return that investors are demanding to buy a property — are going up.” (more…)
Despite recent improvements in the health of European banks, they remain vulnerable to a daunting array of hazards that are expected to produce another round of sizable write-offs in the next couple of years, the European Central Bank said.
Its report cataloged in detail the problems facing the region’s financial institutions.
The challenges for banks in the 16-nation euro zone include exposure to a weakening commercial real estate market, hundreds of billions of euros in bad debts, economic problems in East European countries, and a potential collision between the banks’ own substantial refinancing needs and government demand for additional loans, the central bank said.
In its twice-yearly review of risks facing the nations that use the euro currency, the central bank expressed particular concern about banks’ need to refinance long-term debt of an estimated 800 billion euros, or $984 billion, by the end of 2012.
European banks will need to set aside an estimated 123 billion euros in 2010 for bad loans, and an additional 105 billion euros in 2011, the report said. That would be in addition to the 238 billion euros they set aside from 2007 to 2009.
Note: The commentary that follows has been taken from Jim Chanos’ speech to a group of investors, on the subject of China’s economy. The video of this speech can be viewed below.
Hedge fund manager Jim Chanos has generated some controversy over the past few months because he has had the temerity to argue that China is experiencing an asset bubble. Skeptics argue that he misunderstands the nature of the Chinese economy.
There are four main parts to his argument:
• GDP drives economic activity.
• Local party bosses have an incentive to game the system
• Real estate speculation
• Overbuilding of industrial and commercial real estate
Let’s take these arguments one by one.
1) GDP drives economic activity
In most industrialized countries, GDP is what Chanos calls a residual: it is the result of economic activity. But in China, GDP growth is seen as sacrosanct, and Beijing sets a GDP growth target every year. Local party bosses act to ensure that they meet this target.
2) Local party bosses have an incentive to game the system
Since GDP growth is explicitly stated as a public policy, local political bosses have an incentive to make sure that they contribute to the country’s efforts to meet the GDP target growth rate. In practice, this means that local municipalities can, for example, meet revenue targets by selling off land to developers. Party bosses have an incentive to sell as much land as possible, regardless of whether doing so creates too much supply.
3) Real estate speculation
One of the main arguments advanced against Chanos’ China thesis is that real estate speculators in China have to have more equity than do their American counterparts. The implication is that China won’t suffer from a meltdown of real estate. But this argument, while possibly correct, misses Chanos’ larger point. Speculators in Beijing buy up multiple apartments, seeing them as a store of value, akin to commodities like gold or palladium.
Implicit in this practice is the notion that there is a greater fool down the line. Treating real estate as a store of value, rather than an investment that produces real or imputed monthly cash flows in the form of rent defies economic logic. (more…)
Wilbur Ross and George Soros are out today calling for crash of commercial real estate.Read more here:
Despite recent improvements in the health of European banks, they remain vulnerable to a daunting array of hazards that are expected to produce another round of sizable write-offs in the next couple of years, the European Central Bank said. 