Working on REIT again, I am having the opportunity to look at the failed models of General Growth (an internally managed Real Estate fund in US) and Centro (an Australian asset management company).
No doubt that these structures (including other property funds and trusts) all suffered from excessive leverage which ultimately pushed them either into bankruptcy or re-structuring when the property value falls, the process of levering up by these funds and the shocking cliff diving of their stock price performance in 2008 are quite intriguing.
I think the key reasons that pushed these vehicles over the cliff within such short period of time are primarily driven by the securitization model. The securitization model made these trusts and eventually broke their back.
General Growth represents a piece of the evolving CMBS market in US. Beginning in the 90s, upon taking over the failed balance sheet of banks suffered in the Savings and Loans crisis, the CMBS market quickly took steam. With a few billions in the beginning, it quickly evolved into a trillion dollar business by 2007. An active secondary market and strong liquidity for CMBS transfers into lower cost of capital for real estate borrowers. Coupled with rising valuation, the real estate investors took on the ride of no return...
Centro rode on a similar wave yet in a slightly different way... Centro started the fund management model as listed funds became popular in Australia. Through acquiring properties via private funds and selling funds public, Centro was able to arbitrage the dividend multiple and generate additional cash flow from acting as the asset managers for those funds... (look at today's Capitaland model)
As you see, the securitization model made the property market exciting, and lots of people rich during the process up until the credit crunch of 2008, when the market froze over. In a credit crunch, liquidation began with the more liquid assets such as the stock, bond, CMBS or anything that is traded. A fire-sale will send the CMBS price into a free fall which quickly eliminates much of the equity value within a very short period of time - this is what happened during the 2008. As CMBS prices drop to rock bottom, valuation of the property is "expected" to fall substantially and re-financing of the CMBS becomes near impossible because of the valuation gap, which pushes the property fund/trust into a liquidity crisis (admittedly for those over-leveraged like General Growth, investors quickly realized that a drop of 30% of the valuation already put the fund into insolvency), which in turn sends the equity to a point of no return. The case of MIREIT (Macarthurcook REIT in Singapore is an example which had $200mm of outstanding loan expiring in the mid of the credit crisis. The stock price dropped to basement level although its "theoretical" property valuation remained at $500mm).
Well, what makes it breaks it. Your strength is your weakness. well said. Lessons learnt: be cautious when others are greedy.
Monday, March 22, 2010
Sunday, March 21, 2010
Thank God I was born in 70s
For Saturday night entertainment, I watched Phoenix TV's 9pm live debate (hosted by 胡一虎). Again, it's about the property prices (According to Contrarians it should be indicator that price is about to fall - hope they are right). There were some insightful comments - there are certainly not short of insightful people not in control of power in China. Anyway, it was lively debate. It just got me into another point to be posted here.
I am not trying to be sarcastic by writing such a title. The reality is that those born in 80s, 90s, and maybe subsequent generations are, in general, less privileged than my generation (yes, 70s!). we had the chance of swimming naked in crystal water before growing up, being "the country's flowers" before going to college (if admitted), getting a job before leaving the school, paying affordable mortgages before getting married... Things just became dearer and dearer afterwards.
I have to pause and think how the next generation is going to prop up the social costs if there aren't significant structural changes made in the coming years. High property cost, as many blames, is driven by land cost and "excessive" local government spending. I don't know what's excessive or un-excessive, but clearly there is already stress in filling up the budget, at the time when the national GDP is still going strong at minimum 8%+.
How long this 8% can be here, when the rest of the world want to export as well? When US transformed itself into a consumer-driven economy, its GDP was growing at 3-4% when it was healthy. And it still ran on borrowing from the rest of the world.
Today's China is hard to sustain at 3-4%. Simple reasons i have include:
* there is a bigger government to sustain. Cost of sustaining the government should also include those "grey income" of the public servants as eventually productive labors have to bear it
* aging population and its healthcare costs
* less efficient use of resources as a result of wasteful state infrastructure investments in recent years and large sections of economy remained under state controlled enterprises
On the contrary, let's see what we have:
* less productive workers as a result of one child policy
* restrictive immigration policy, meaning less frequent exchange of capital and talents and potentially lower productivity
* other things - social inequality, lower education, etc...that points to a possibly lower productivity than today's US
Clearly GDP won't go on at 8%+ for ever. Is China sustainable when it's below 8%? what about 3-4%? To me those are structural issues that needs to be addressed. I have not found an answer so can only observe as it develops - that's what i can do as a "roadside economist" (watching events develop while standing on the road side).
I am not trying to be sarcastic by writing such a title. The reality is that those born in 80s, 90s, and maybe subsequent generations are, in general, less privileged than my generation (yes, 70s!). we had the chance of swimming naked in crystal water before growing up, being "the country's flowers" before going to college (if admitted), getting a job before leaving the school, paying affordable mortgages before getting married... Things just became dearer and dearer afterwards.
I have to pause and think how the next generation is going to prop up the social costs if there aren't significant structural changes made in the coming years. High property cost, as many blames, is driven by land cost and "excessive" local government spending. I don't know what's excessive or un-excessive, but clearly there is already stress in filling up the budget, at the time when the national GDP is still going strong at minimum 8%+.
How long this 8% can be here, when the rest of the world want to export as well? When US transformed itself into a consumer-driven economy, its GDP was growing at 3-4% when it was healthy. And it still ran on borrowing from the rest of the world.
Today's China is hard to sustain at 3-4%. Simple reasons i have include:
* there is a bigger government to sustain. Cost of sustaining the government should also include those "grey income" of the public servants as eventually productive labors have to bear it
* aging population and its healthcare costs
* less efficient use of resources as a result of wasteful state infrastructure investments in recent years and large sections of economy remained under state controlled enterprises
On the contrary, let's see what we have:
* less productive workers as a result of one child policy
* restrictive immigration policy, meaning less frequent exchange of capital and talents and potentially lower productivity
* other things - social inequality, lower education, etc...that points to a possibly lower productivity than today's US
Clearly GDP won't go on at 8%+ for ever. Is China sustainable when it's below 8%? what about 3-4%? To me those are structural issues that needs to be addressed. I have not found an answer so can only observe as it develops - that's what i can do as a "roadside economist" (watching events develop while standing on the road side).
Thursday, March 18, 2010
This week: RMB, Property Price, Inflation
Just a short post. I am urged to do so when the headlines in the past 4 days shows the same thing - Renmingbi and property prices/ land sales.
Clearly Renmingbi has become a political issue - both China and US politician enjoy very much wrestling on the point whether a piece of paper bearing Chairman Mao's face is worth more or less, now both sides are getting even more excited by spitting on each other's face... we observers please don't forget both are secretly cranking out their own paper as much as they want... I just don't know when it will stop. Just enjoy watching it when it's going on...
I checked my eco101 and find this term called "PPP" invented by economists in an ideal world... I am not sure what's an ideal world but let me just use this methodology, I realize that the money I have to pay to buy an apartment at my hometown (Wuxi), at the current exchange rate, can already afford me a no-worse house in a small city in of US along East Coast! Gosh! I bet most Chinese people would choose to move to US if allowed ... So i don't know where is the under-valuation from. it may be 5 years ago. but now a 1/2kg of bakchoi costs 7 yuan. US politicians should be pitiful about Chinese people.
This brings about the topic of inflation. Property price is not the only one catching the headline. Electricity, water, and gasoline costs already moved up. The only thing has not yet moved, probably, is wage. But i think it won't be long. Our economists/statistician selectively "ignored" too many items on the CPI check... soon i think they themselves will scream for wage inflation to keep up with expenses.
On international front, Fed maintained its previous statement that it will keep interest rate low for "extended" period. I hate linear projection but have to think about the inflation scenarios more seriously. The beast may turn out to be uglier than expected...
The money tap is still turned wide open by the Central Bankers, in the name of "still fragile" global recovery. Soon my wallet may indeed become very fragile because it can't keep the money inside from not shrinking...
Clearly Renmingbi has become a political issue - both China and US politician enjoy very much wrestling on the point whether a piece of paper bearing Chairman Mao's face is worth more or less, now both sides are getting even more excited by spitting on each other's face... we observers please don't forget both are secretly cranking out their own paper as much as they want... I just don't know when it will stop. Just enjoy watching it when it's going on...
I checked my eco101 and find this term called "PPP" invented by economists in an ideal world... I am not sure what's an ideal world but let me just use this methodology, I realize that the money I have to pay to buy an apartment at my hometown (Wuxi), at the current exchange rate, can already afford me a no-worse house in a small city in of US along East Coast! Gosh! I bet most Chinese people would choose to move to US if allowed ... So i don't know where is the under-valuation from. it may be 5 years ago. but now a 1/2kg of bakchoi costs 7 yuan. US politicians should be pitiful about Chinese people.
This brings about the topic of inflation. Property price is not the only one catching the headline. Electricity, water, and gasoline costs already moved up. The only thing has not yet moved, probably, is wage. But i think it won't be long. Our economists/statistician selectively "ignored" too many items on the CPI check... soon i think they themselves will scream for wage inflation to keep up with expenses.
On international front, Fed maintained its previous statement that it will keep interest rate low for "extended" period. I hate linear projection but have to think about the inflation scenarios more seriously. The beast may turn out to be uglier than expected...
The money tap is still turned wide open by the Central Bankers, in the name of "still fragile" global recovery. Soon my wallet may indeed become very fragile because it can't keep the money inside from not shrinking...
Friday, March 5, 2010
Capital markets, risk model, and globalization
James Rickards, a former LCTM legal counsel and long-time capital market practitioner talks about capital markets, risk models and effect of globalization on the capital markets.
An interesting piece. James G. Rickard
Interesting points include:
* How the faulty Wallstreet's VaR model does not model the capital market risks and a "power model" derived from physics would be a better one in constructing a stable capital markets. A good analogy of how Richter scale is created to build cities around world regardless it's not forward-looking. (It's intriguing how a lawyer is so attracted to physics being applied to economics, and a new field of science - Econophysics)
* Wallstreet greed, arrogance, and repeal of glass-steagal act created the same bubble leading to 1929 crash.
* This time is no different to depression era essentially. Market is in a critically unstable state with tensions building up between deflation force and inflation attempt by government printing press.
* How globalization and unregulated derivative markets created a system that's strongly co-related and eventually too big to fail.
* Regulations on OTC derivative market, developing exchange-traded derivative market, breaking up of big banks, Volcker rule, etc.
* Banks' role and CDS trading on Greece problems
An interesting piece. James G. Rickard
Interesting points include:
* How the faulty Wallstreet's VaR model does not model the capital market risks and a "power model" derived from physics would be a better one in constructing a stable capital markets. A good analogy of how Richter scale is created to build cities around world regardless it's not forward-looking. (It's intriguing how a lawyer is so attracted to physics being applied to economics, and a new field of science - Econophysics)
* Wallstreet greed, arrogance, and repeal of glass-steagal act created the same bubble leading to 1929 crash.
* This time is no different to depression era essentially. Market is in a critically unstable state with tensions building up between deflation force and inflation attempt by government printing press.
* How globalization and unregulated derivative markets created a system that's strongly co-related and eventually too big to fail.
* Regulations on OTC derivative market, developing exchange-traded derivative market, breaking up of big banks, Volcker rule, etc.
* Banks' role and CDS trading on Greece problems
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