4/14/10

Can someone help me out? How can the expected return from the commercial real estate be "0". At the very least the property must be worth something so they can sell it right? Why did they for example give an entire portfolio of properties to Barclays / RBS for 1 euro?

Original Article: http://online.wsj.com/article/SB100014240527023036...

Comments (21)

4/14/10

First, their fund was $8.8b so it's not a total loss on their capital. Second, do you understand the concept of capital structure at all? If I'm sitting in the equity or mezz, a 20% decrease in value could make my position completely worthless.

As for why they would just hand it over for an euro, I would imagine because they don't see any scenario in which paying future upkeep costs/renovation/etc. would make it profitable and it's simpler and easier to just get rid of the position.

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4/14/10

Holding onto real estate without paying tenants is pretty costly. Taxes and maintenance must still be paid. If you look at value as whatever the market is willing to pay I suppose you could value properties at zero. With such a saturation, reduction in credit and the current economy having large office space unused is a huge liability.

4/14/10

One side note, sort of alluded to above, is the specific nature of commercial RE. A lot of places are funded with the assumption that they will re apply for a loan to take out the previous construction loan at a certain point. I don't know enough to really go deep into it, but RE financing is specific with a bunch of nuances.

4/14/10

i'd assume they took out debt against the properties and now the assets < liabilities -> negative equity

4/14/10

Got it. I was going through their specific projects, Pegasus which was a $540m investment and Fujisawa which was around the same both have projected returns of 0 which raised an eyebrow... rough times

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4/14/10
4/14/10

HAH! You beat me to it. I was putting something together about this for tomorrow. Big, big hit. It's looking like the other shoe in commercial real estate is getting ready to fall.

In reply to breakinginnew
4/14/10

breakinginnew:
i'd assume they took out debt against the properties and now the assets < liabilities -> negative equity

that's probably what happened. i had to underwrite a couple of investments that were debt financed by msref, both SIGNIFICANTLY upside down. so i am assuming that that is the situation that most of their investments are in.

msref is in UNUSUALLY bad shape, relative to every other cre player. if losing money was an olympic sport, then msref would get a gold medal. their bonuses should be clawed back.

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man made the money, money never made the man

4/14/10

why is morgan up over 2% despite this news..

4/14/10

on a side note, this may be a harbinger for financial armageddon. losses like this could translate to the commercial banking sector (which btw still refuses to realize tangible losses in cre), then that could feasibly trigger another major financial shit storm. i posted something about this a while back.

correct me if im wrong.

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man made the money, money never made the man

4/14/10

MS exited their position in china real estate market, lost a ton in last couple yrs.
how hard is that? losing money in the bubble time.

In reply to overclass
4/14/10

overclass:
why is morgan up over 2% despite this news..

Maybe because everyone already knew their RE holdings were shit, probably.

4/14/10

I don't know, whenever I hear about massive write downs I always think about the next year when they will have a huge gain from these overly pessimistic assumptions.

In reply to jhoratio
4/14/10

Because they are not losing $5.4Bn...they are losing 20% (? I think the article said 20%) or whatever MS's firm committed amount is. And they are telling their investors this now (their fund investors, or LPs, not stockholders), which means they took the write-down already. Duh.

In reply to mr1234
4/14/10

mr1234:
,,,could translate to the commercial banking sector (which btw still refuses to realize tangible losses in cre)

exactly. pretend and extend! kick the can down the road! we'll see how CMBS defaults go over the course of the year

4/15/10

Msref VII Global!!!!

i saw a marketing memo of a manager trying to raise money for a distress/opportunity fund last year, it was funny because they were using previous LPs as track record to raise the next LP. For one of the previous, the initial projected IRR was18%- 20%, but the actual current IRR was ~0%, with ~3 more years of lock up, and a few of the projects wont ever see profit. But somehow they still raised money for the next LP.

Similar to MSREF, Goldman's Whitehall isn't doing so great either, but I think the losses on these funds have mostly been accounted for; it's pretty clear cut when all the investments are worth 0. The problem is with the commercial lenders that have portfolios of loans that will never be repaid, but still not written down from the balance sheet, and they wont as long as they are not forced to mark to market.

4/15/10

The worst thing is that the fund is still having capital calls. Think about all the investors who have to continue putting good money toward bad shit. I am under the impression that a bunch of MS MD's have invested in MSREF vehicles and are therefore hurting.

4/15/10

Someone had it right about the buidlings being in negative equity. If I buy a property for 100 with 85 of debt / 15 equity and commercial property values drop 30% the building is worth 70, but your equity is worth -15. Basically the bank now owns the property and will have to write down 15 on the loan as well (not all of them have though). At this point MSREF is happy to hand the keys to the bank and let them deal with it. What is hurting MSREF is that they have contractual obligations to pay out even more money (that will not be debt financed) to complete renovations, interest garauntees etc.

The reason why its taking a while for the CRE debt bubble to pop is because even though a ton of loans are worth more than the property they are charged against, the rents are still able to cover the interest payments. So even though the LTV covenants have been breached, the banks are willing to look the other way in hopes that capital values will increase before the maturity of the debt. It will also give owners the chance to injext more equity to get the loan within covenants.

Of course there are shit properties (low rents and bad tenants) with massive loans, or developments that are semi complete with no more financing to complete them. Those are the properties that everyone is going to lose a ton of money on.

In reply to noexplode
4/15/10

noexplode:
Msref VII Global!!!!

i saw a marketing memo of a manager trying to raise money for a distress/opportunity fund last year, it was funny because they were using previous LPs as track record to raise the next LP. For one of the previous, the initial projected IRR was18%- 20%, but the actual current IRR was ~0%, with ~3 more years of lock up, and a few of the projects wont ever see profit. But somehow they still raised money for the next LP.

LP's trying to recoup losses by investing in distressed cre. sounds counter-intuitive, but it is what it is.

personally i dont have any faith in cre appreciation for the near-term. demand was driven by the debt mkts, and that shit storm still hasnt passed.

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man made the money, money never made the man

4/15/10

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In reply to mr1234
4/22/10

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man made the money, money never made the man

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