No good news is emanating from the US banking sector. This time it is commercial real estate loans. Markets were suffering from sub-prime mortgage issues as related residential mortgages turned out to be not so good loans after all. Concerns are now mounting over commercial real estate loans following suit.
Concerns were prompted by Riverton Apartments, a 12-building residential development, in Harlem New York, when it warned last week that it might not be able to honour a $225 million mortgage payment by September. Riverton’s mortgage was also wrapped into a commercial mortgage backed security which was subsequently structured and sold as bonds. According to New York Times, a default by the complex would be New York’s largest in the current housing crisis. Wall Street banks are estimated to hold approximately $100 billion of commercial mortgage-backed securities.
The news has raised concerns over the commercial real estate market and loans as its deterioration could lead to more write-downs in the already suffering banking sector. Several major banks have exposure to the sector which includes Deutsche Bank (NYSE: DB) (estimated $25.1 billion), Morgan Stanley (AMEX: AMK) (est. $22.1 billion) and Citigroup (NYSE: C) (est. $19.1 billion). Lehman Brothers (NYSE: LEH) is estimated to have the highest exposure (est. $40 billion) according to New York Times.
We discussed in a previous note Lehman’s attempts to raise capital from Asian Sovereign Funds. Lehman however is not alone here and all are on the look out to dispose of commercial real estate loans made up of hotels, retail malls and offices.
Cracks have already started to appear. Moody’s REAL Commercial Property Price Index (CPPI) has continued to fall in June with a 3.3% monthly decline, marking a 9.6% decrease from year-ago levels. June is the fourth straight month the index has declined and in total CPPI has fallen 12 percent from its dizzy heights in last October. All four property types measured in the index have posted negative returns in 2Q2008. The national industrial market has suffered most with 9.3% decline during the quarter. The national apartment market, offices and retail have also fallen 7.1%, 5.9% and 4.6% respectively.
For the savvy investor however, there were enough early warnings. Morgan Stanley and Wachovia announced large write downs related to commercial mortgage losses in late last year and 1Q2008 respectively. More similar write-downs to follow it appear making hopes of a banking sector revival bleak.
Courtesy: New York Times, Moody’s, CEP Newswires
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