March 11 – March 17, 2016

Chinese cracking down on P2P lenders. Anbang is off to a bang in U.S. real estate. Tick, tick, tick – CMBS not looking so good.

Happy St. Patrick’s Day!  To add a bit of good news, the Dow Industrials turned positive for the year yesterday and U.S. crude closed above $40 a barrel for the first time this year.  Woohoo.  This week will cover more real estate articles than usual, actually all three have ties to real estate – that’s just how it goes sometimes.  Starting in China  is 1) Don Weinland and Yuan Yang’s  “China to crack down on P2P lenders” in the Financial Times, followed by 2) Arash Massoudi, James Fontanella-Khan, and Lucy Hornby’s “China’s Anbang agrees (to) $6.5bn hotel deal with Blackstone” in the Financial Times, which really goes hand-in-hand with Joshua Jamerson’s “Starwood Gets Offer From Group Led by Anbang, Threatening Marriott Deal” in the Wall Street Journal, and 3) is Diana Olick’s “Real estate’s ticking bomb: Who gets hurt” in CNBC.

Other items that are worth a mention (a way for me to highlight a few more articles – with less content):

  • Following up on the difference between pro forma earnings and GAAP earnings and particularly for Tech companies, “Stock-based compensation isn’t a real expense – or so tech companies would have investors believe.”
    • “The difference between pro forma results and those reported under general accepted accounting principles, or GAAP, has been widening. Facebook’s GAAP net income was only 56.6% of its pro forma net income in 2015 down from 62% in 2014. For S&P 500 tech companies as a whole, there was a 19% gap between the two earnings measures in 2015, nearly double the difference in 2014.”
    • “That may have been why Warren Buffett again felt compelled to address the issue in his annual letter to Berkshire Hathaway shareholders. Excluding stock-based compensation is ‘the most egregious example’ of ‘managers telling their owners to ignore certain expense items that are all too real,’ he wrote. ‘If compensation isn’t an expense, what is it? And, if real and recurring expenses don’t belong in the calculation of earnings, where in the world do they belong?'”
  • It’s getting hot in here. “Last month was the hottest February in 137 years of record keeping, according to data released Thursday by the National Oceanic and Atmospheric Administration (NOAA). It’s the 10th consecutive month to set a new record, and it puts 2016 on course to set a third straight annual record.”
    • “The El Nino that started that started last year produced some of the hottest temperatures ever witnessed across great swaths of the equatorial Pacific. By some measures, this may now be the most extreme El Nino on record.”

Bloomberg_Global Heat Wave_3-17-16

  •  At China’s ‘two sessions,’ the party leadership is pushing more stimulus. It appears that the party leadership wants to keep the good times rolling at least until Xi Jinping has the opportunity to appoint his own nominees to the Standing Committee of the Politburo (the highest committee of the political system – 5 of 7 seats will be open) in 2017.
    • “China is aiming for just 3% growth in government revenue this year, suggesting that more of the deficit will come from tax cuts to private firms.”
    • “Promises to slim industries such as steel and coal sound tough – the government expects nearly 2m workers will be laid off-but the planned reduction would make only a small dent in oversupply. Instead the government seems to be doubling down on its well-worn recipe of debt-and investment-fueled growth.
    • “Credit is growing at twice the rate of nominal GDP, in a country already overburdened by private debt.”
  • $81 million was stolen from Bangladesh this week.  Turns out the money was routed to the Philippines, specifically to some casinos.  Why, because the Philippines, and especially their casinos, have the toughest privacy laws around – ‘don’t ask, don’t tell.’
  • Otto Warmbier, a U.S. college student was sentenced to 15 years of hard labor for attempting to steal a poster from a hotel in North Korea.
  • Brazilian President Rousseff had appointed her predecessor (Lula) to a cabinet position to provide him with a degree of legal immunity – prosecutors are seeking to indict him for involvement with the Petrobas scandal, but just before the appointment took hold, a judge barred the position.  Not so fast…
  • With negative yields taking hold in Japan, Japanese institutional investors are looking to invest funds in overseas real estate.

Interesting graphics:

From Barry Ritholtz’s The Big Picture blog.

Bianco Research_Negative Interest Rates in the World_3-17-16

*Note: bold emphasis is mine, italic sections are from the articles.

China to crack down on P2P lenders.  Don Weinland and Yuan Yang. Financial Times. 14 Mar. 2016.

“Unregulated funds have ploughed billions of renminbi into the property market in recent months.”

As a result, “Home sales in Beijing, Shanghai, Guangzhou and Shenzhen, China’s “first-tier” cities, grew 14% last year compared with about 7% nationwide. In Shenzhen, the average price per square meter in February increased by about 50% compared with a year earlier, according to Soufun, a real estate consultancy.”

FT_Chinese residential property prices_3-14-16

As Xia Le, chief economist for Asia at BBVA, a bank, puts it “I have been very nervous about this because it reminds me of the US subprime crisis. In the past, people buying houses paid using their own money but now they’re using speculative shadow finance.”

Basically, Peer-to-Peer (P2P) companies have allowed borrowers to circumvent government controls – requirements for buyers to have a 30% down payment for their first home and up to 50% for subsequent properties – meant to slow property price growth.  The challenge is that the P2P sector is loosely regulated and its size is not fully known. Further, P2P loans are not cheap.  “P2P loans typically mature in 90 days and carry hefty interest rates of up to 12%.”

FT_Chinese P2P Market_3-14-16

China’s Anbang agrees (to) $6.5bn hotel deal with Blackstone. Arash Massoudi, James Fontanella-Khan, and Lucy Hornby. Financial Times. 13 Mar. 2016.

There was a lot of press about Chinese insurer Anbang this past week.  It started with Anbang buying Strategic Hotels & Resorts from Blackstone for $6.5bn. Blackstone only just closed on the 16 luxury US hotels (includes the Hotel del Coronado in San Diego and the JW Marriot Essex House Hotel in NYC) three months ago for $6bn.  Not a bad way to make a buck for Blackstone – especially considering the odds are high that a good deal of leverage was used in the initial purchase.

Who is Anbang? Anbang was founded and is led by politically connected (married to the granddaughter of Deng Xiaoping) 40-something Wu Xiaohui has grown from a small car insurer with approximately $60m in assets 12 years ago into a financial services conglomerate with over $123bn in assets (as of February of last year).

But don’t stop there.

Starwood Gets Offer From Group Led by Anbang, Threatening Marriott Deal. Joshua Jamerson. Wall Street Journal. 14 Mar. 2016.

Before the ink could dry on the Strategic Hotels & Resorts deal, Anbang along with Chinese investment firm Primavera Capital Group, and J.C. Flowers & Co, submitted (March 10) a $12.8bn unsolicited bid for Starwood Hotels & Resorts Worldwide Inc, about $1.8bn more than the currently agreed to (in November 2015) deal that Marriott had made with Starwood.

Per Starwood’s current deal with Marriott, they have until March 17 to talk with rival bidders.  Don’t feel bad for Marriott.  “Marriott noted that if Starwood were to terminate the deal, it would owe Marriott a $400 million termination fee.”  Also not a bad way to make a buck – for Marriott and Starwood.

Shareholders of each company are scheduled to vote on the deal on March 28.

Geez Louise.

“Chinese companies have done more than $84 billion in deals since the start of the year, according to Dealogic, setting them up to top the record $108 billion of Chinese outbound acquisitions reached last year.”

Well that’s one way to get money out of China.

 

Real estate’s ticking bomb: Who gets hurt. Diane Olick. CNBC. 10 Mar. 2016.

Last week I made mention of defaults starting to show up in the commercial property sector.  Well a large part of that has to do with demand for commercial mortgage backed securities (CMBS) which effects property owners and developer’s abilities to refinance and acquire assets.  Bottom line, demand for CMBS bonds is drying up at the current yield offerings, especially considering the yield offered relative to other high-yield debt products.

In reference to ‘cracks’ showing up in CMBS financing, Willy Walker, Chairman and CEO of Walker & Dunlop – one of the largest suppliers of multi-family loans in the country, had this to say, “I think cracks is a little bit of an understatement for where the market has been for January and February, where, for all practical purposes, the market was frozen.”

CMBS “maturities are expected to surpass $400 billion annually this year and in 2017, according to CBRE, a real estate services firm. That is $100 billion more than last year. CBRE “conservatively” estimates that 18 percent of loans this year and 29 percent of loans next year could have problems refinancing, due to lack of investor demand for the bonds. This translates into about $43 billion in potentially troubled loans over these two years.”

Though, “the real refinancing wave doesn’t kick in until June, but starting in June there’s about $10 billion a month that needs to be refinanced, so unless the CMBS market finds its level and starts to price and transact again, we’re going to have more than cracks,” – Walker.

Interestingly and relatedly, “Commercial real estate prices have been strong for a few years now, thanks to high occupancy and strong demand, but in January they fell nationally for the first time in seven years, according to the Moody/RCA Commercial Property Index.”

“This is a significant milestone that signals that a shift in sentiment among commercial-property investors is under way.” – Moody’s

Other Interesting Articles

Bloomberg Businessweek

The Economist

FT – US oil producers lock in high prices 3/10

FT – China property, Tier-1 vs the rest 3/10

FT – Equity funds draw investors for first time in 2016 3/10

FT – Bangladesh central bank governor quits over $101m cyber heist 3/15

FT – Weak Japan wage demands deal blow to Abenomics 3/15

FT – ‘Lion may be lurking’ in markets, warns BlackRock 3/15

FT – Anbang’s Starwood bid shines light on China’s deal gate-crashers 3/15

FT – Dubai property developer Nakheel in talks over push into Asia 3/15

FT – North Korea sentences US student to 15 years’ hard labor (for attempting to steal a poster) 3/16

FT – Valeant backer Sequoia Fund’s value plunges 3/16

FT – Judge’s bar on Lula puts Brazil on edge of constitutional crisis 3/17

National Real Estate Investor – Foreign Buyers of U.S. Assets Show No Signs of Slowing Down 3/16

Nikkei Asian Review: Mitsubishi Estate eyes 100bn-yen overseas real estate fund 3/13

NYT – The Assets of the Ultrarich Come Closer to Earth 3/10

NYT – China Weighs Letting Banks Sell Bad Debt to Investors 3/12

NYT – Investors Increasingly Bullish on Energy Sector 3/14

NYT – Brazen Heist of Millions Puts Focus on the Philippines 3/16

ValueWalk – SEC Charges Fund Executives In Alleged Oregon Ponzi Scheme 3/14

WSJ – Aging Bull Market Has Fed in Its Corner 3/10

WSJ – Subprime Flashback: Early Defaults Are a Warning Sign for Auto Sales 3/13

WSJ – How Google Could Put Pay-TV in a Box 3/13

WSJ – Why China Real-Estate Giant (Vanke) is Going Back to its Roots in Bid Defense 3/14

WSJ – Why China’s Bad Debt Solution Isn’t Magic 3/15

WSJ – The Big Valeant Asset That Could Disappear 3/16

Yahoo Finance – The chilling math of inequality 3/15

Special Reports

 

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