Friday, March 20, 2009

Toxic Asset

Wouldn’t’ you be a little wary about buying something called a “Toxic Asset.” It’s like walking down a supermarket aisle and seeing a bathroom cleaner with a skull and crossbones and the word “POISON” in bold red letters. But, that bathroom cleaner is the one that works; you just need to heed the directions, warnings as they are, to immediately wash your hands in water from the Sea of Galilee should you inadvertently touch it. But from the sounds of it, the U.S. government’s announced $1 Trillion Toxic Asset Plan will not require that type of announcement to those buyers who will stroll the halls of Congress and presumably choose those portfolios that they’d like to take home with them. Of course, our government states that , “to help protect taxpayers, who would pay for the bulk of the purchases, the plan calls for auctioning assets to the highest bidders.” How lovely. What a novel idea. So here are the three components of this masterminded plan: One: The Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell. (SF Note: Setting up public-private partnerships is a frightening thing). Two: The Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money. (SF Note: The Vegas odds-makers have pegged these firms already so I doubt if we’ll see any surprises there). Three: The Treasury plans to expand lending through the Term Asset-Backed Securities Loan Facility, a joint venture with the Federal Reserve. Yup, this is exactly what I would do….Not. But then again our government is in a desperate battle to do, as Todd Rundgren’s album was titled, “Something, Anything.” I’m worried that these solutions will back-fire, big-time and fairly quickly and just as the money given to companies like AIG, just as a poster child, will end up being misused, abused and will help change Toxic Assets into Toxic Solutions for only the privileged few. And in the end they'll have so little skin in the game they're not worried at all about the poison touching their skin. But I think the real opportunity is to start selling bottled water from the Sea of Galilee-anybody want to form a partnership with me? Last item about MIPIM. Here are some things heard at MIPIM as posted on - “When the going gets tough the tough get going...To the south of France!” Boris Johnson, Mayor of London - ”There were two kinds of people at MIPIM. Those complaining about the lower number of visitors, and those happy with the higher ratio of C level people there.” Magnus Svanteg√•rd of Datscha -“We are all feeling the impact of this new world order where what happens in a blink may affect our lives and those of our clients.” DLA Piper - "We feed our investment team Prozac on a regular basis." Janice Stanton of C&W - “There’s no talk about sovereign funds or Russian oligarchs compared to last year.” Dietrich Heidtmann of Morgan Stanley - “It is not the strongest of the species who survive, nor the most intelligent, but the ones most responsive to change." Charles Darwin quoted by Robert Newhart of Innovation Center - “When money no longer controls your culture, there’s room for new ideas to establish themselves.” Wolf Priz, leading architect - “Be open to new people, everyone is in the same boat today.” Steve Felix, Aviva - "The immediate future is very much in the hands of our banks and the success of our government support.” Nigel Roberts, JLL - “The US government should stop saying they will sweeten the pot. No one wants to be seen as a premature ejaculator.” Ken Patton, Dean New York University RE Institute Natasha Richardson’s death this week was very sad. While we only know what we read in the papers it sounds like the delay in getting medical attention made the unfortunate difference. It’s a reminder, once again, that life is so fragile and it can change in the blink of an eye. The PREA Spring Conference is coming up in Washington, DC next week. The advance registration list just came out and there are 666 names on it! Given what is going on in the world and the industry, that is a huge amount and congratulations to PREA for putting together a program that is attracting a lot of interest. I’ll give you my report next Friday. I finally saw “Slumdog Millionaire” on a flight recently. What a powerful movie. Now I know what all the hoopla was about. And speaking of hoop-la: Syracuse wins their first round. While I don’t have a TV where I can watch four games simultaneously but I think this is going to be one of the most exciting NCAA’s in a number of years. Singer/Songwriter of the Week: A couple of months ago I bought a piano through Craigslist from Shannon Corey. While I have not yet seen her perform live I thought you might like the new song that she has on her website called “I Miss Home). (p.s. the song is also available for download at iTunes). Where I'll be: Mar.24: New York to moderate a panel at the Second Annual iGlobal Forum Real Estate Private Equity Summit. Mar. 25-26: Washington DC to attend PREA's Spring Conference Apr. 10-11: New York to see Umphrey’s McGee at the Nokia Theatre (a great venue) April 23-25: Athens, Greece for INREV’s Annual General Meeting and Conference May 14-16: North Palm Beach, FL to attend the annual Homer Hoyt Institute and Weimer School sessions with some of the industry’s leading academics. These are my personal views and not that of my employer.

Sunday, March 15, 2009


Many of you have asked me to either eliminate or reduce the use of links in this column. I forgot that in my last post and have copied the excellent article about the MIPIM Summit which appears on the website of Real Estate Publishers and was written by REP Senior Editor Bernd Struben.

The exclusive event drew a full house of top investors from around the world. The interactive format between the panel and the invitation-only audience was kept on track by moderators Steve Felix, Head of Real Estate Client Relations-North America, Aviva Investors, and Janice Stanton, Senior Managing Director, Cushman & Wakefield. The panel comprised Peter Reilly, Managing Director, JP Morgan Asset Management, Hans op ‘t Veld, Head of Real Estate, PGGM, Joe Valente, Head of Portfolio Management, Allianz Real Estate GmbH, and Dietrich Heidtmann, Managing Director, Morgan Stanley.

Does anybody really know what time it is?
With the world economy sagging and real estate taking a big hit everyone is looking for advice. REP’s MIPIM Summit 2009 topics included: rebuilding confidence in the real estate industry; what the best plans are given the current market situation; the right price for risk; how to decide between debt and equity when the yield on debt can exceed that on equity; examining when the bottom will be reached; and asking if people think enough outside the box?
When the audience of top industry executives was polled on when they expect the recovery to commence, no one raised their hand for 2009, most expected the first half of 2010, and about a quarter voted for the second half of 2010. When the audience was asked their expectations for the value loss from peak property prices in 2007 to the eventual trough the majority expected a loss of 30-50%, while none thought it would be less, and a few expected an even greater loss in values.
MIPIM Summit 2009
Peter Reilly, Managing Director, JP Morgan Asset Management.
Peter Reilly, Managing Director, JP Morgan Asset Management: “Following the last two to three years of very aggressive growth we’re looking at a major change in the next few years. Operating in a no-growth environment the focus will be on individual properties and working closely with the tenant. In the near term the focus will return to trying to add value to the existing portfolio, and there will definitely be a switch back to mature markets and reducing risk throughout the portfolio. There is no pressure to invest today; we’re only making acquisitions selectively where they make very good sense.
By and large investors have lost a huge amount of equity. Right now they are reluctant to commit until they are sure we have hit bottom. They prefer to wait until 3-6 months after we’ve hit bottom to reenter the market. Investors are shell shocked, in a cash defensive position. But in 2012-2014 inflation from all of the mounting government debt is going to kick in, so property will become very attractive. In the mean time a lot of debt needs to be restructured; a lot more needs to be done to bring confidence back in the system. It’s going to be back to the people who really know what they’re doing and can stick it out for a few years.”
MIPIM Summit 2009
Hans op ‘t Veld, Head of Real Estate, PGGM.
Hans op ‘t Veld, Head of Real Estate, PGGM: “The REIT market has seen a wild ride over the last two years. The volatility is quite high. Right now there is a gap between the direct markets and the REIT markets, and the question is, whose pricing is right? We’re quite worried about the whole deleveraging process that’s going on. We’re more interested in well capitalized companies; capital has become quite expensive. In the last few years the game to play was yield compression. The question is, was that a sensible thing to do, particularly in the smaller markets with so much capital pouring in?
On the investor side the UK, US, and Singapore have probably hit bottom in terms of sentiment. My concern is with continental Europe; I don’t think the acceptance is there yet. The realization is still to come that rents are going to be what they were. We’re adapting and learning a lot. Looking forward things look quite attractive. Inflation will be back, and we can get our hands on assets we really like.
Trust is wonderful to have with investors, but evidence is even better. You’ll see more scrutiny in the future.”
MIPIM Summit 2009
Joe Valente, Head of Portfolio Management, Allianz Real Estate GmbH.
Joe Valente, Head of Portfolio Management, Allianz Real Estate GmbH: “We have a mandate to grow over the next few years, but there is no pressure to buy immediately. Our overall strategy places a lot of focus on the core markets, but we are also interested in the distressed markets. The priorities are where you think the greatest opportunities are. There is no overall answer as to when the bottom will be reached. It will be different in different markets, different in London than in other cities. The big issue in our markets is the debt overhang, the debt rollover. This may make real estate lag behind the macro economic recovery; investors may ask for higher returns. We’re looking at five to 10 years to unravel the debt, but there are lots of opportunities. There’s an 8% yield in London, which looks great until you realize rents are going to fall 50%, so then you have a yield of 4%. And then you currently have a 5% yield in Bucharest, which just doesn’t make sense.
For the first time in the entire cycle people are learning the value of fundamentals. It’s a great time to be an equity player. It’s about the asset; it’s about understanding the local market. Now is the time to talk to major players about grade-A assets, because those will be the first to go.
The goal is finding the ideal combination of a distressed loan but not a distressed asset.”
Dietrich Heidtmann
Dietrich Heidtmann, Managing Director, Morgan Stanley.
Dietrich Heidtmann, Managing Director, Morgan Stanley: “The reasons why people went into real estate in the first place are still valid. I haven’t met anyone who is reconsidering their involvement in real estate. But the benefits of having a globally diversified portfolio have been less clear in the last 24 months, so people have started to refocus on their home markets, a more domestic focus even though there are still great cross-border opportunities.
Today investors with capital know the value of that capital. To be successful today in raising a fund you have to start with investor feedback and know what they’re looking for. The typical fund of ‘here, this is what we’re doing’ is not effective today. Communication is the key with today’s investors.”
Janice Stanton
Janice Stanton, Senior Managing Director, Cushman & Wakefield.
Janice Stanton, Senior Managing Director, Cushman & Wakefield: “There is an interesting interplay between greed and fear in the markets. The US has lost 4 million jobs and vacancy rates will still go up. If you can hang in there and be selective, there are some incredible buying opportunities coming up in the next few years.
We’re seeing the reemergence of local players. In smaller deals of under 25 million, certain people can do this entirely with equity; they’re seeing the yields and stepping in.”
Steve Felix
Steve Felix, Head of Real Estate Client Relations-North America, Aviva Investors.
Steve Felix, Head of Real Estate Client Relations-North America, Aviva Investors: “There are and will continue to be opportunities in the US, but capital has become more conservative than it has ever been. Experience is a premium.
The past five years were actually extraordinary, but since they’re the recent past, we think of them as normal.
It’s very important for senior people in General Partnerships to visit the investors. That makes the investors feel comfortable that you’re on the job and know what you’re doing, and people will pass this on.”

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