Tuesday, 27 July 2010

US PROPERTY - 'Tremendous distress' in commercial real estate

For those of us who enjoy gnawing at the entrails of our banks, it's worth listening to a guy who's at the sharp end of the commercial property market in the US...

Scott Rechler is CEO of RXR Realty, a real estate scavenger with a cash hoard looking to 'help' banks relieve themselves of their troublesome property loans. He's well clued-up and reveals in stark terms what most analysts have long been saying: troubles in commercial real estate are another recovery-snuffer.  Banks are sitting on $trillions in bad property deals which they are praying will come good, rather than selling to the likes of Scott and being forced to realize a loss.

As we all know it was only the suspension of mark-to-market accounting rules last spring which made it possible to consider the US banking system solvent.  Since then, banks have essentially valued these loans according to their own whims (generally known as 'mark-to-fantasy' accounting).  $200billion of these will need to be refinanced over the next three years, creating a potential feast for vultures like Rechler.  But until the bad loans themselves either recover fully or are expunged from the books, they will continue to be a dead weight on bank balance sheets, profits and, therefore, overall US stock returns.  

Still wonder why banks won't start lending into the real economy?