Entries Tagged 'Investment' ↓

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General Electric (GE) has long been a bellweather for the economic state of the US economy. So when they missed on their earnings it sent a shockwave through the financial markets. But the reason they missed was due to Bear Sterns meltdown in mid March.

GE always keeps some real estate in it’s pocket that has accrued gains to manage their earnings. When they get near the end of the quarter they sell of what needs to be sold off to keep investors happy and calm. This is perfectly legal and has been done for years.

Well, this quarter, just as they were set to sell of some assets for a profit of 100 million dollars to hit their number, Bear Sterns melted down. This crisis in the credit market cost GE the window to sell the property, and thus they reported lower earnings.

Not very complicated but it was far reaching.

In a conference call with analysts, CEO Jeffrey Immelt explained that the real estate business didn’t measure up because GE didn’t close as many deals as expected in the quarter. The reason? “We experienced an extraordinary disruption in our ability to complete asset sales and incurred impairments [on lower loan and asset values] and this was something we clearly didn’t see until the end of the quarter,” Mr. Immelt said.

The “disruption” referred to Bear Stearns’ announcement March 15 that it needed federal help in finding a buyer or else it would fail, which caused the credit markets to freeze and scuttled planned property sales.  via Financial Week.

Here is a question to the media.

Why is it when residential sales drop it is because of the fault of the housing industry, but when sales of commercial properties fall it is because of the credit crunch?

I know I am seriously generalizing the issue but that is how the media is approaching this.

• All residential problems are reported as based upon upon greed, subprime problems, and fraud.
• All commercial real estate problems are based upon the credit markets falling apart.

Yet both market problems were created by prices soaring too high and money that was too easily given. The dynamics are not that different but the reporting is.

Sales of US hotels are expected to fall as much as 50 per cent this year because the credit squeeze has reshaped investors’ ability to purchase real estate, says a report due for release today.

The value of hotel property sales is expected to fall to $23bn-$26bn, down from a record $45bn in 2007, as deals become more difficult, according to real estate brokers Jones Lang Lasalle. The expected slide in sales would more than undo last year’s 38 per cent rise.

“The credit crunch has halted mega-deals and many portfolio deals,” the report will say. via the Financial Times

The San Jose Mercury News today talks about pricing a home and the benefits of the $417,000 price point. For those who do not recognize the number, $417,000 is the limit of qualifying for a conforming loan that Freddie Mac or Fannie Mae will purchase. This limit is huge as once it is breached you are in the territory of Jumbo Loans that carry a higher burden of approval and higher interest rates.

Say you need to unload a home quickly that is in the mid $400,000  range quickly, what pricing strategy should you go after? If you really need to move it, pricing it at the $417,000 price point will open all of the buyers who can qualify for the conventional loan into the mix. Now the other alternative is to price it at 10 percent over the Conventional loan limit and market it as that, so buyers who have 10 percent saved will be able to qualify.

If I was selling a 500,000 plus dollar home and needed it to move I would reduce to $500,400 as this is the $417,000 limit plus 20 percent down payment, again bringing in the buyers that will qualify for a conventional loan.

Marketing the home is all about widening the pool of potential buyers and sacrificing a few dollars or aiming for a price point. With tightening credit standards and available credit the amount of folks that will qualify for a conventional loan is much greater than those who can be approved for a Jumbo loan. And I think few will argue that more potential buyers in a slow market is bad advice to a seller.

This will also get the buyer thinking in terms of long term savings which is a very smart strategy. For me, it is all about getting the buyer to think outside of the normal pitch and have them realize that even as a sellers agent you have their best interests at heart.

Loans of $417,000 and less are purchased by the Federal Home Loan Mortgage Corp. or Federal National Mortgage Association, two agencies, that, with the government’s help, provide a lower interest rate to home buyers. Loans of more than the conforming loan limit of $417,000 are called jumbo loans and usually have higher interest to absorb lenders’ perceived loan risk.
“Maximum conforming limit loans are where the money is,” said Jay Damato, a mortgage broker and owner of Elite Financial in Walnut Creek. “That’s where you can still do a zero-down — 80 percent first, 20 percent second.”
Damato said he wasn’t surprised agents are telling sellers to hit around the loan limit.
“Jumbo loans are more expensive and harder to qualify for,” he said.
In August, a cash crisis hit the lending industry, creating a huge chasm between those who could qualify for a conforming loan and those who could qualify for a jumbo loan. Because of the higher risk, some lenders increased jumbo interest rates more than 2 percent. San Jose Mercury News

If you are trying to see where the best place to put your money in the real estate market you may be surprised. Real Estate Investment Trusts (REITs) have taken a beating in the market recently but now may be the time to buy them up.

Shares of a REIT typically sell for a modest premium over the firm’s net asset value — the estimated value of the real estate in the REIT’s portfolio — said Mike Kirby, director of research at Green Street Advisors, a Newport Beach-based investment firm that specializes in the REIT industry.

Recently, REITs on average have been selling for about 20% less than their net asset values, he said. That would suggest investors believe commercial real estate prices are likely to fall sharply. Because such a decline is “already baked into the cake,” the shares are attractively priced, Kirby said. “It may feel like a bad time, but there are some important valuation metrics that say differently,” he added. via Los Angeles Times.

Investing in markets when they are down and they look their worst is one of the great ways to make a fortune. Conventional wisdom typically lags the actual market place so when the media and pundits start screaming we have hit bottom, the bottom has typically passed and the opportunities are out there. So take a look at REITs and find the deals. They are out their now.

As the United States commercial and residential markets slow down, Wall Street is not prepared to wait for the next big thing domestically. Large players like Goldman Sachs and Morgan Stanley are already making large investments in Asia. Goldman announced a 200 billion yen investment in Japan real estate this year on the assumption that Japan has a great deal of upside after their long and painful housing recession.

And this is the lesson of the real estate markets and why we should not be so worried that their downturns will spark huge national recessions and upheavals. With the globalization of investment dollars, corporate America and Wall Street are not stuck in any one investment or region. If the US real estate market slows down, tough for the agents and builders, but corporate America will head overseas to the newest hot spot.

So for the agents and those dependent on local real estate for  their livelihood, their can be a great deal of angst and despair. But for the global economy issues like a slow market, credit crunch, or subprime fall out are potholes in the road to success. Not enough to stop Wall Street, but just inconveniences to be dealt with.

Japanese commercial land prices rose this year for the first time since the property bubble burst in 1991, crippling the world’s second-biggest economy with three recessions in the following 15 years. New York-based Goldman spent 2 trillion yen since 1998 buying Japanese properties including golf courses, spa resorts, jewelry stores and cinemas.
Morgan Stanley has also been on an acquisition spree spanning offices, hotels and residential developers. In April, Morgan Stanley agreed to buy 13 hotels in Japan from All Nippon Airways Co. for 281.3 billion yen in what was Japan’s largest real estate purchase by an overseas investor. via Bloomberg.com

After a roller coaster few weeks, the combination of the Federal Reserves activity (lowering the bank rate and infusing capital into the lending market) and the banks continuing to lend, real estate funds had an outstanding week.

• CBRE Realty Finance up 34.06%,
• Crystal River Capital  up 16.94%,
• Gramercy Capital Corp/New York  up 15.52%
• American Financial Realty Trust  up 14.75%.

Not too shabby after a rough period.

All this liquidity makes it possible for banks to keep lending. Going one step further, Bank of America helped to stabilize the mortgage industry by investing $2 billion in Countrywide Financial (CFC - Cramer’s Take - Stockpickr - Rating), easing fears of bankruptcy at one of America’s largest mortgage lenders.
Optimism abounded. The market rallied, and real estate companies rose too. The average real estate fund tracked by TheStreet.com Ratings climbed 6.91% for the five trading days ended Thursday, Aug. 23.  via The Street

Countrywide Financial, the 500 pound gorilla in the mortgage lending world is in a fight for it’s survival as share prices plummeted yesterday in trading. In pre-market trading this morning today, Countrywide is down 10 percent.

Bankruptcy fears gripped the stock on Wednesday as an Merrill Lynch analyst wrote:

“If enough financial pressure is placed on Countrywide or if the market loses confidence in its ability to function properly, then the model can break, leading to an effective insolvency,” Merrill Lynch & Co. analyst Kenneth Bruce wrote. “If liquidations occur in a weak market, then it is possible for Countrywide to go bankrupt.” via Reuters

With the stock trading at lower in pre-market activity this morning, Countrywide issued a press release stating that they were going to use their 11.5 billion supplemental credit facility.

“As we have previously discussed, secondary market demand for non-agency mortgage-backed securities has been disrupted in recent weeks,” said David Sambol, President and Chief Operating Officer. “Along with reduced liquidity in the secondary market, funding liquidity for the mortgage industry has also become constrained.

“For many years, Countrywide’s liquidity management framework has focused on maintaining a diverse, multi-layered assortment of financing alternatives,” said Sambol. “A primary component of this framework is a committed, unsecured credit facility of $11.5 billion provided by a syndicate of 40 of the world’s largest banks. In response to widely-reported market conditions, Countrywide has elected to draw upon this entire facility to supplement its funding liquidity position. Over 70 percent of this facility has an existing term greater than four years and the remainder has a term of at least 364 days. Press Release

This is the story to watch for the real estate market and mortgage industry today. Countrywide has been changing their lending standards to conform to todays climate and if they can weather this storm the company should continue to be a force in the mortgage industry. 

If you are investing in real estate, be prepared for the big boys to be moving in. The demand for high yield investments is surging and many Wall Street players are looking to commercial real estate to achieve great gains. The stock markets are trading at historic highs and people are looking to diversify their earnings.

So all of those mega billion real estate deals over the last year may seem tame in the coming twelve months as the 69 billion is invested in the commercial real estate market.

Morgan Stanley, the biggest real estate investor among Wall Street banks, said today it raised $8 billion to create the largest global property fund. Goldman drew $4.07 billion for a realty fund, twice as much as it originally sought.
More than 100 real estate funds may raise a record $69 billion this year as investors seek better returns than stocks and bonds provide, according to Private Equity Intelligence Ltd. Morgan Stanley’s high-return real estate funds have posted average annual gains of more than 20 percent since 1991, about twice the return of the Standard & Poor’s 500 Index.  via Bloomberg.com

If you are looking to invest in the mercurial real estate market in China, you probably are going to have a tougher time of it in the coming couple of years. Government regulators have issued tougher restrictions on foreign property investment to try to slow down the rampant appreciations of property value.

While the larger cities such as Shanghai have already hit bubble stage, secondary cities such as Dalian, Qingdao and Hangzhou are just starting to see investments coming into the real estate markets. Communist regulators are afraid of property values skyrocketing in these cities and hurting the lower middle class.

A STRICTER approval process will be applied to foreign investment into China’s real estate market, especially in the high-end sector, according to a notice jointly released by the country’s top two regulators.
The notice, published by the Ministry of Commerce (MOFCOM) and the State Administration of Foreign Exchange (SAFE), will give the MOFCOM authority for final approval of a project. It also imposes a strict threshold on foreign investor applications to establish real estate companies. Only those that have land use rights and own property can establish real estate firms. via The Star

In my post, The Irish Are Coming, The Irish Are Coming I focused on the increased spending on New York City by Irish buyers. Now reading an article out of Chicago I see that the Irish are also buying up property in Chicago too. The low tax, high growth environment is creating amazing wealth in Ireland and they are looking to invest in United State real estate in increasing numbers.

So if you have properties that are not moving well, maybe buying some advertising in Ireland is not the craziest of ideas. 

Having established beachheads on the East Coast, Irish investors have turned their attention here, as evidenced most dramatically by Dublin developer Garrett Kelleher’s plan to erect the Chicago Spire, a 150-story lakefront condominium tower.

Kelleher is hardly the first to eye trophy real estate here, however. Anglo Irish Bank Corp. this year financed the $93 million purchase of 625 N. Michigan Ave. by a syndicate of Irish investors. An Irish builder is putting up a 35-story condo building in the South Loop. Irish realty brokerages are partnering with U.S. developers to market high-rise condos while they’re still on the drawing boards.

So far, most buyers are of the institutional stripe, typically buying blocks of condos or prominent commercial sites. But individuals, empowered by the thriving Irish economy, are starting to get noticed in the marketplace, some brokers say.  “They’re certainly out there,” said Catherine Steigmann, a broker for @Properties in Chicago who visited Dublin and Limerick last year to promote Lexington Park, a condo development that the Limerick-based Chieftain Group is putting up on the site of Al Capone’s old hangout, the Lexington Hotel.

Steigmann said Irish investors have bought about 70 of the building’s 333 units, with varying intentions. “Some are going to use it as a second home; some are planning to send children to school here; some see it just as an investment opportunity for a few years. They’ll rent it out and see how it goes,” she said. via the Chicago Tribune.