Feb 11, 2009
US ECONOMIC STIMULUS PLAN
Commercial property included
NEW YORK - THE commercial real estate industry applauded the government's move to include commercial mortgages in a key lending program on Tuesday, but experts said the plan's lack of details is disconcerting.
Treasury Secretary Timothy Geithner said the government's Term Asset-Backed Securities Loan Facility
will include securities backed by commercial property loans.
The programme, being developed by the Federal Reserve,
allows investors to swap AAA-rated securities for US Treasurys, which could then be used as collateral for new financing. The goal is to create new lending in a now frozen market.
The news comes not a moment too soon for the
troubled commercial real estate industry, which is facing a deluge of debt coming due this year at the same time that property prices, rents and occupancies are falling.
If commercial landlords can't refinance, loan defaults will spike and lenders could end up owning shopping malls and office buildings along with their piles of foreclosed homes. That would likely prolong the credit crisis.
'There was a sense of urgency to do this quickly,' said Brendan Reilly, the lobbyist for the Commercial Mortgage Securities Association, about the bailout. 'It's critical to kick-starting the market.'
The market for commercial mortgage-backed securities, or CMBS, virtually shut down last year as the financial system unraveled.
CMBS are commercial mortgages that are pooled together, sliced into pieces and resold as bonds. The money that lenders receive from the bonds is used to fund more loans.
The CMBS market funded nearly half of all commercial mortgages in 2007 at the height of the industry's boom. Last year, that shrank to 5 per cent, Reilly said.
The result? Sales plunged and, along with it, property prices.
Construction and acquisition loans dried up. And refinancing for short-term debt stalled. Commercial foreclosures have become a real possibility for even the soundest properties and owners.
'No one is calling for a bailout for high-flying guys who overpaid at the top of market, but there are many healthy owners with performing assets who can't access the debt markets right now,' said Dan Fasulo, managing director of research firm Real Capital Analytics.
About US$171 billion (S$257.7 billion) of non-bank commercial mortgages are scheduled to mature this year, according to the Mortgage Bankers Association.
And while defaults on commercial property loans now are relatively low barely above 1 per cent, they could shoot up to between 5 per cent and 6 per cent if credit conditions don't improve, said Victor Calanog, research director at Reis Inc.
'It's a great first step' Calanog said about the plan, 'but there's much to be done in fleshing out the details.' The plan leaves out a key piece of the puzzle:
How will the government price CMBS assets, or any securities backed by debt? So far, the free market can't value them because no one is buying them, said Hessam Nadji, managing director at Marcus & Millichap Real Estate Investment Services.
'It sounds good in concept, but I'm still having a hard time deciphering the real solution,' Nadji said. 'The devil is in the details.' -- AP
http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_336827.html
