Commercial property investors brace for worst
SAN DIEGO (Reuters) - Last year, real estate investment trust (REIT) investors knew the party was over, but they did not expect it would take so long to clean up the mess.
"It's scary" is the standard morning greeting this week at the National Association of Real Estate Investment Trusts (NAREIT) annual convention held in San Diego. Attendance was down 17 percent this year.
The global credit drought has been especially hard on the commercial real estate industry, which relies heavily on debt to finance purchases of shopping centers, office buildings, hotels, apartments and warehouse and distribution centers.
U.S. commercial property sales in October were down about 75 percent from a year earlier, according to research firm Real Capital Analytics.
"The sentiment from the investors is horrific," David Simon, chairman and CEO of No. 1 U.S. mall owner Simon Property Group Inc (SPG.N).
"People are depressed, in shock almost," said a banker who asked not to be identified. "The REIT investors are stuck like a deer in headlights."
On Wednesday, the convention's first full day, REIT shares, as measured by the benchmark MSCI US REIT Index .RMZ fell a whopping 13.4 percent.
Constance Moore, CEO of BRE Properties Inc (BRE.N), an apartment REIT, attributed the decline to the commercial mortgage-backed securities (CMBS) market having one of its worst days, which prompted investors to short REIT shares to offset their losses on the bond market.
REIT shares were down another 8 percent Thursday. So far this year, they have lost 62 percent and are off nearly 73 percent from their highs in February 2007.
"Any piece of bad news is viewed as 'End of the World, Part III,'" said James Reilly, head of Syndicated Leveraged Finance for JP Morgan Securities.
HUG YOUR BANKER
From 2005 through the first part of 2007 credit was plentiful and easy to obtain, fueling a U.S. commercial real estate boom. The CMBS market, which used pools of commercial mortgages to back bonds later sold to investors, funded most of the sales.
In those three years, the CMBS market accounted for a total of $600 billion of financing, which has dropped to $12 billion so far this year, said Moore, who is also the chairwoman of the NAREIT.
The alternative lenders, such as life insurance companies and banks, are tending to their own balance sheets and extending credit only to long-established best customers. REITs have been working to extend their lines of credit past their maturity dates.
"The real estate companies, both private and public, compete with other industries across the globe for credit," Reilly said. "Clearly, right now, real estate is not a favorite asset class. Hug your banker."
IT CAN GET WORSE
The credit crisis has morphed into an economic crisis with consumers pulling back their spending and unemployment rising. For real estate, this has translated into increasing vacancy rates and softer rents, both of which are expected to worsen.
Because publicly traded REITs issue shares that can be bought and sold on exchanges, "they provide a window into the much larger and less liquid direct real estate market, where buyers purchase buildings not shares," Moore said.
"REIT shares suggest that values have declined as much as 20 percent, perhaps even more," she said. "Where the tip of the iceberg goes, the rest of the iceberg goes."
As more and more property owners fail to secure refinancing for maturing loans and default, bargains may become abundant. But Simon said that if the credit markets remain as tight as they are, his company will not be among the buyers.
"It's frustrating because we love to be opportunistic. But I think the better part of valor today is to be wildly conservative," he said.
"And you don't want to take on somebody else's problems," said Peter Lowy, group managing director and head of the Americas unit of world's largest mall owner, Westfield Group
(WDC.AX).
Many investors took the comments as a thinly veiled reference to General Growth Properties Inc GGP.N.
Investors had speculated whether Simon or Westfield would buy the No. 2 U.S. mall operator or some of its malls which are up for sale. General Growth said on Thursday it has hired a bankruptcy attorney while trying to dig out of about $27 billion in debt maturities and commitments.
Meanwhile, several REIT executives said they are focused on just surviving the crisis.
"The people who have the longest staying power and have the lowest leverage have the best chance of making it to the other side," said Debra Cafaro, chairman and CEO of senior housing provider Ventas Inc (VTR.N).
(Editing by Matthew Lewis)
