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Wednesday, November 28, 2007

Bloomberg: Derivatives Indicate Commercial Property "Meltdown"

by Calculated Risk on 11/28/2007 11:05:00 AM

From Bloomberg: Deadbeat Developers Signaled by Property Derivatives (hat tips Brian & FormerlyknownasJS)

The cost of derivatives protecting investors from defaults on the highest-rated bonds backed by properties more than doubled in the past month, according to Markit Group Ltd. Prices suggest traders anticipate defaults rising to the highest level since the Great Depression, according to analysts at RBS Greenwich Capital in Greenwich, Connecticut.

The seven-year rally in offices and retail properties ended in September when prices fell an average of 1.2 percent, according to Moody's Investors Service. More losses are likely because banks are holding $54 billion of commercial mortgages they can't sell, data compiled by New York-based Citigroup Inc. show.

Real estate deals are coming apart at the fastest pace since September 2001, when the U.S. economy was shrinking, because banks are tightening standards for loans, said Robert White, president of Real Capital Analytics, a New York-based research firm.
``The commercial real estate market is imploding,'' said James Ortega, who manages $150 million at Saenz Hofmann Fund Advisory in Sao Paulo. Ortega has set trades to profit from a decline in property companies' shares. ``We're about to experience a very significant correction.''
The fundamentals for CRE appear to be at a turning point: vacancy rates are rising, more inventory is coming online, prices for commercial property are now falling, and lending standards (as loose as subprime lending) are being tightened. That sounds like the ingredients for a "significant correction".