NEW YORK, NY - Lehman Brothers' do or die decision Wednesday to spin off up to $30 billion in commercial real estate loans and buildings highlights how jittery worldwide investors are about all things real estate. The last-ditch plan was part of sweeping measures the investment bank is taking to survive. Lehman, which reported a $4 billion third-quarter loss, also will sell a majority stake in its investment management business, and said a sale of the entire company was possible.
Lehman has been a major player in financial deals for office buildings, hotels and retail centers. It invests in real estate properties and loans in the United States, Europe and Asia. Lehman, for example, was a key player in Tishman Speyer Properties' $22.2 billion acquisition last year of Archstone-Smith Trust, an apartment building operator. But over the past year, the credit crunch has spread to commercial real estate financing, stalling or killing plans for some major developments in cities around the world.
That deterioration forced Lehman's plan, announced Wednesday, to spin off $25 billion to $30 billion of commercial real estate investments into a separate publicly traded company. The new company, called Real Estate Investments Global, is expected to be launched in the first quarter of 2009. "These are difficult times, there's no way to sugarcoat that," said Dan Fasulo, managing director of research firm Real Capital Analytics, which estimates that total U.S. commercial property sales were down 70 percent in July from last year's levels.
Fasulo, however, noted that the American commercial real estate market is in far better shape than the battered housing market, which has seen a tremendous surge in defaults and foreclosures. Building developers were more cautious this decade than in earlier real estate cycles, and U.S. cities for the most part are not replete with vacant office buildings. The main problems are with properties financed at the top of the commercial real estate market last year, Fasulo said.
With weak demand and prices falling in major cities around the world, "the only sellers out there today are sellers that have to sell," said Lawrence Longua, a commercial real estate finance expert at New York University Schack Institute of Real Estate. "Values in commercial real estate are clearly not going up."
Still, while loan defaults for hotels, retail, office buildings and the like are rising, but they are nowhere near the levels for residential properties. Total delinquencies on commercial mortgage-backed securities rose to 0.53 percent at the end of June, up from an all-time low of 0.31 percent at the same time a year earlier, according to the Mortgage Bankers Association.
Nevertheless, the total amount of new securities backed by commercial real estate loans plummeted to $12 billion in the first half of the year from $137 billion a year earlier, the trade group said. "There continues to be a fundamental disconnect," between the performance of those investments and investors' willingness to buy them, said Jan Sternin, senior vice president of commercial and multifamily at the mortgage bankers' group.
Lehman also said it has reduced its residential mortgage exposure by 31 percent to $17.2 billion, and expects the sale of $4 billion of its U.K. residential mortgage portfolio to BlackRock Financial Management Inc. to be completed within the next few weeks. Lehman also reduced its commercial real estate exposure by 18 percent in the third quarter to $32.6 billion from $39.8 billion. While financial regulators had forced Lehman to regularly recalculate the value of commercial real estate assets on its books, those same restrictions will not affect the new company. Lehman executives say the new structure will allow executives to focus on the long-term.
Troubles appear to be worse overseas. CB Richard Ellis said in a report this month that Britain has been most affected so far by a decline in commercial property prices, but the credit crunch is also having a greater impact in Spain, Ireland, Sweden and France. In Britain, overall purchase prices for commercial property are down 20 percent from mid-2007 and could fall an additional 15 percent in the coming year, according to Capital Economics. "The market won't pick up before 2011," said Kelvin Davidson, an economist at the London consulting firm.
A high-profile casualty was a 47-story building planned for London's central financial district. Developer British Land revealed last month that it is delaying the $500 million (286 million pound) project, which had been due for completion by 2011. Pieter van der Meijden, a Brussels-based analyst for private banking group Petercam, said that sales activity across Europe has disappeared at the moment, making it difficult for surveyors to value real estate. "Deals are nonexistent," he said.
Source: MyCentralJersey.com