What makes it breaks it

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.