May 31, 2017

The Massive Leverage Will Flow Over

A report from the Australian. “When three similar global city real estate markets start showing the same patterns, it’s highly likely you are seeing a major trend emerging. The three major markets showing the same nervous trends are Vancouver, Sydney and Melbourne. And what is happening in the real estate market is being duplicated in other areas of the economies of Australia and North America. What we are seeing in the three markets (Vancouver, Sydney, Melbourne) is a reduction in Chinese buying and reluctance by the non-Chinese locals to buy at the high prices. Melbourne prices dropped 0.5 per cent last week to sit 1.8 per cent lower than a month earlier. Prices in Sydney fell by 0.1 per cent, a seventh straight weekly decline that left prices in the NSW capital 1.3 per cent down over a month.”

From Domain News. “Foreign property investors are shifting their focus away from Victoria after several government policy changes which experts say could lead to a slowdown in the economy. Many China-based businesses that only sold Australian properties have already closed, while some are diversifying their businesses by selling other countries’ real estate. The removal of the Victorian stamp duty concession for off-the-plan investors was introduced against a backdrop of Australian banks tightening lending rules and the Chinese government limiting the amount of money moving offshore.”

“AMP Capital chief economist Shane Oliver said it appeared building approvals for new apartments in Victoria had already peaked, which would be a dampener on the Victorian economy. ‘Hopefully other parts of the economy will fill the gap [such as tourism, higher education and infrastructure projects]; it was never going to be the case that housing was going to keep us going forever,’ he said.”

From ABC News. “In a surprise move, Australia’s booming property market has made one asset manager worried enough to shut down his multi-million-dollar fund and hand back all the money to his investors. Philip Parker, the chairman and chief investment officer of Altair Asset Management, had written to investors explaining that he was returning their funds at an ‘overvalued and dangerous time in this cycle.’”

“‘In the last six to eight months, the investment committee of Altair have felt, to varying degrees, that the property market was heading into bubble territory,’ he told the ABC in an exclusive radio interview on Business PM. ‘The massive leverage that you’re seeing in terms of people’s exposure to property will then flow over to other liquid assets. Secondly, I felt China property and debt issues will become a major factor later in the year.’”

From Bloomberg. “Australian house prices fell in May for the first time in 17 months, in an early sign lending restrictions are starting to damp demand. The monthly decline comes after regulators tightened lending curbs amid fears of a housing bubble, and the nation’s banks raised interest rates — especially for interest-only loans which are popular with property investors seeking to take advantage of tax breaks.”

“‘The market has lost momentum, particularly in Sydney and Melbourne where affordability constraints are more evident and investors have comprised a larger proportion of housing demand,’ CoreLogic’s head of research Tim Lawless said.”

From Perth Now. “Perth’s property market has taken another hit as signs grow runaway prices in Sydney and Melbourne have finally come to an end. CoreLogic reported over the past year values for houses in Perth have fallen by 4.2 per cent, the second worst market in the country behind Darwin where prices have tumbled by 8.8 per cent. Nationally, unit prices edged down by 2.6 per cent led by a 3.8 per cent fall in Melbourne. There have been concerns of an over-build of units, particularly in parts of Brisbane and Melbourne, driven by investors looking for capital gains.”

“‘It appears that housing activity has eased which is attributable to a range of factors including affordability constraints, tighter credit policies, rising mortgage rates and a downturn in consumer sentiment towards housing,’ said CoreLogic head of research Tim Lawless. ‘Considering we are yet to see the full effect of the recent round of macroprudential measures flow through, there is a high possibility that investor activity, and consequently housing demand, will slow further during 2017.’”

From The New Daily. “The latest building approval numbers may herald the beginning of the end of the construction boom that the Australian economy is so reliant on, according to experts. Data released by the Australian Bureau of Statistics on Tuesday showed that buildings approvals fell by 17.2 per cent between April 2016 and April 2017, based on seasonally adjusted figures.”

“The Melbourne and Brisbane apartment markets are widely thought to be oversupplied. About 5000 new apartments are expected to be completed and up for sale in Melbourne this year alone. BIS Economics found 50 per cent of new apartments bought and sold in the last five years sold at a loss. The Reserve Bank sounded the alarm earlier this year about deteriorating market conditions after investment declined in late 2016. The central bank warned that increased supply and lower population growth had already depressed rents and apartment prices in Perth and Brisbane.”

The Courier Mail. “Another Brisbane construction company has gone under in the latest sign the downturn in the city’s apartment market is deepening, and a damning prediction from an industry insider says many more companies will soon fall. Liquidators were called in to wind up Nathan-based CMF Projects this week, leaving scores of subcontractors in the lurch and at least two incomplete projects around Brisbane.”

“Subcontractors Alliance spokesman Les Williams said he expected at least one construction company to collapse every month as the market unravelled. Mr Williams said that since Christmas creditors, including subbies, had lost an estimated $100 million, as building companies went under.”

From Reuters on China. “The banker at the other end of the phone line was furious, recalled Shanghai lawyer Wang Chaoyu. A pile of steel pledged as collateral for a loan of almost $3 million from his bank, China CITIC, had vanished from a warehouse on the outskirts of the city. Just several months earlier, in mid-2013, Wang and the banker had visited the warehouse and verified that the steel was there. ‘The first time I went, I saw the steel,’ recalled Wang, an attorney at Beijing DHH Law Firm, which represents the Shanghai branch of CITIC. ‘Afterwards, the banker got in contact with me and said, ‘The pledged assets are no longer there.’”

“it is indicative of a much wider problem that could endanger the health of China’s financial system – fraudulent or ‘ghost’ collateral. When bank auditors in China go looking, they too often find that collateral recorded on the books simply isn’t there. In some cases, collateral that has been pledged simply doesn’t exist. In others, it disappears as borrowers in financial distress sell the assets. There are also instances in which the same collateral has been pledged to multiple lenders. One lawyer said he discovered that the same pile of steel was used to secure loans from 10 different lenders.”

“With the mainland facing its slowest growth in over a quarter of a century, defaults are mounting as borrowers struggle to repay their loans. The danger of fraudulent collateral in this situation, say economists, is that it exacerbates the problem of bad debt for China’s banks, increasing the risk of financial turmoil. A Reuters review of dozens of court cases involving collateralized loans and interviews with lawyers, regulators and 30 bankers in China reveal that fraudulent collateral – in the form of buildings, private apartments, copper and steel – is haunting loans across a wide swath of business and industry.”

“Fraudulent collateral is ‘a huge issue,’ said Violet Ho, senior managing director and co-head of Greater China Investigations and Disputes Practice at Kroll, which conducts corporate investigations on the mainland. ‘Often you also see that the paperwork around collateral may be dodgy, and the bank loan officer knows, the intermediary knows, and the goods owner knows – so it’s essentially a Ponzi scheme.’”

“In a report last September, Fitch Ratings estimated that it would cost as much as $2.1 trillion to clean up China’s bad debt – almost a fifth of annual Chinese economic output. Fitch Ratings has mentioned ‘wildly misleading’ property valuations as one reason why high collateral coverage may not protect banks. Another is a sudden fall in property prices. According to Fitch’s Grace Wu, over 60 percent of financing in China uses property as collateral in some way. More than three years since lawyer Wang Chaoyu took the phone call from the incensed CITIC banker about the missing collateral from Hanning Iron and Steel, the lender is still trying to get back some of its money. CITIC is now trying to sell several apartments that were put up as part of the security for the ill-fated loan.”

What They See As An Insatiable Appetite

A report from the Boston Globe in Massachusetts. “It’s too soon to declare victory, but Mayor Marty Walsh’s housing policies are clearly starting to help the two-thirds of Boston residents who rent their homes. City statistics show that average rents fell by 4 percent last year in older units in Boston. The biggest reason for the dip in rental prices up to this point is visible on the skyline: After taking office, Walsh pledged to build 53,000 new units of housing, a goal he appears to be on track to meet. Many of those new units, whether they’re condos or apartments, are too expensive for the average family. But the city believes that they’ve reduced the demand on older housing stock enough that owners of existing units have been forced to lower their prices to compete. The law of supply and demand, it would appear, is working in Boston.”

The Daily Press in Virginia. “As apartment rent growth stabilizes after high post-recession demand, renters are expecting more from Peninsula properties, managers say. Hampton Roads is expected to lag behind the nation in apartment demand this year after experiencing job losses related to cuts in defense spending and lagging population growth, according to the latest Hampton Roads Real Estate Review and Forecast. ‘We’re still slightly oversupplied,’Chris McKee, president of operations for The Franklin Johnston Group, said.”

The Baltimore Sun in Maryland. “As developers flood Baltimore with apartments in response to what they see as an insatiable appetite for new residences, the numbers raise a question: Are there too many? Just over 5,600 residential units, mostly apartments, were under construction in Baltimore and 1,800 more were approved as of April, according to the city’s planning department. Another 1,400 units opened just last year.”

“William H. Cole IV of the Baltimore Development Corp., said he thinks the market will determine its own saturation point. ‘As soon as lenders stop financing these projects, we’ll know we’ve reached our capacity,’ he said. ‘But we haven’t reached that yet.’”

“But it could be coming. The Wall Street Journal reported in February that major banks were becoming increasingly cautious in lending for multifamily projects nationwide.”

The Journal Sentinel in Wisconsin. “The Brady St. area is landing another new apartment development, the latest in a series of higher-end projects targeting younger renters on Milwaukee’s east side. Ogden Multifamily Partners LLC will start construction soon on a five-story, 30-unit building, said Jason Pietsch, firm principal. The new buildings are tapping into continued strong demand among millennials for higher-end apartments in the area near E. Brady St.’s taverns, restaurants and shops, Pietsch said.”

“Keystone on Brady’s average monthly rent is $1,650 for a one-bedroom unit, Pietsch said. Nine10 at Land Place will have larger units, and somewhat higher rents, he said. There are some concerns about whether the east side and downtown apartment market is being overbuilt, Pietsch said, especially with River House bringing a large number of new units. But interest in and around Brady St. remains high, he said.”

The New York Post. “Billionaire’s Row is headed for its first foreclosure. The dubious distinction is going to a stunning apartment on the 56th floor of 157 W. 57th St. — the city’s first ‘billionaire’s building,’ which is home to the Big Apple’s only $100 million condo. ‘This is the first high-end condo to go into foreclosure,’ said Kashy Eyn, of Platinum Properties, who is listing the property with Cash Bernard.”

“A mystery buyer who shielded his identity behind an LLC, Central Park Immobilier, bought the unit for $21.4 million in 2015. It is now on the market for $22.5 million — where it has agonizingly lingered for the past 547 days, according to Streeteasy. There is now a lien on the property for $20.9 million ‘plus interest and costs,’ and a foreclosure auction is slated for June 14, according to Property Shark. ‘We rarely see luxury condos up for auction, let alone in such an exclusive building as One57, home to the city’s most expensive condo ever sold,’ a Property Shark spokesman said.”

“A source told The Post there have been several offers on the unit, but the seller has rejected them ‘because they weren’t high enough.’ Only about 30 residential properties in Manhattan have been slated for the first time to go to foreclosure auction during the first quarter of 2017, said Property Shark’s Nancy Jorisch. One57 was funded by a subsidiary of an Abu Dhabi company linked to a $7 billion global money-laundering investigation, The Post revealed last year.”