Distressed Properties May Flood Markets

Source : The Business Times, May 28, 2009

But Asia is in better shape than mature markets, says GIC Real Estate chief

Distressed property assets may emerge in developed markets in the next two years or so, GIC Real Estate's president Seek Ngee Huat said yesterday.

'Refinancing difficulties will force many property owners to sell their assets into an already weakened market,' he said at the first public seminar organised by the National University of Singapore's Institute of Real Estate Studies.

Dr Seek: 'Refinancing difficulties will force many property owners to sell their assets.'

According to Dr Seek, not many distressed sales have surfaced in the troubled property markets of the US and UK yet. Nevertheless, a 'flood' may come if credit markets remain tight as large volumes of loans mature.

Professor at the Wharton School of the University of Pennsylvania Joseph Gyourko shared some worrying numbers on this at the seminar. He cited estimates from Goldman Sachs, which found that US$1.2 trillion of commercial property debt will come due in the US from 2009 to 2011.

With the near shutdown of the commercial mortgage-backed securities market, some property owners will not be able to obtain refinancing, he said.

In fact, distressed property assets in the US have just started to appear and will increase in number over the next few years, Prof Gyourko told reporters on the sidelines of the seminar. These assets can come from any property segment depending on owners' ability to roll over debt.

There will be a 'historic investment opportunity not seen in the US since the early 1990s' and investors are setting up funds for this, he said.

GIC Real Estate's Dr Seek said that most property markets in developing Asia are in better shape because they relied less on leverage. While mature markets are more likely to offer opportunistic acquisition deals, emerging Asia seems to be attracting strategic long-term acquisitions, he said.

There are also investment opportunities in undervalued real estate investment trusts (Reits), Dr Seek said.

The downturn has affected Reits globally, which are now separated into 'haves' and 'have-nots' - the 'haves' are those with sound asset bases, manageable debt levels and the ability to raise new funds, he said.

'Further consolidation of the Reit market is inevitable,' he added. The 'haves' will survive this downturn and become stronger, while the 'have-nots' will languish and some may eventually fail or be absorbed.