My previous blog posting on December 20th 2007 correctly predicted the credit crunch would cause a spiral of redemptions.
Since then Bear Stearns lost most of its value partly due to its clients pulling $25B worth of assets.
UBS today announced a write down of $19B worth of assets. Deutsche Bank AG, Germany's biggest bank announced today that it will write down 2.5 billion euros ($3.9 billion) of loans. In fact the total value of write downs from European Banks along up to 1st April 2008 now tops $68Billion.
I was in the City today at a meeting with a major Fund. The value of this property fund has been written down significantly, by around 30% since last October. The real reason was because it, along with most of all the banks property asset values, have been over valued. Pressure from investors has meant that the property funds value has been pushed up bit by bit over the past five or so years and their value simply did not reflect the true long term market value of the asset considering all factors. In the same way the low rates of interest charged by banks to private individuals for mortgage loans did not reflect the true long term risk of that lending.
The Funds are now desperate for cash. They would never publicly state just how desperate they are, but believe me they are really desperate. They have dropped the value of their funds to attract new investors. They have also been quietly trying to sell off the family silver to free up the cash but guess what? There are no buyers. Well at least at the prices they are quoting for property assets. What does this mean?
It means that there are significant opportunities out there for people or organizations with cash. The banks want this cash and will pay higher rates of interest on deposits to get it. Clearly good news for the cash rich!
Banks will continue to increase the cost of borrowing to all customers across the board. They will also "cherry pick" customers by increasing their lending requirements preferring to do business with clients who have perfect credit ratings and large bank balances. Bad news for Joe Public trying to get a good mortgage deal.
It also means that there are opportunities for cash rich individuals or firms to buy property assests from these "struggling" funds at a discounted rate. The most likely result is an increase in the number of Opportunity Funds set up to take advantage of "fire sale" property assets being offloaded by the banks. Good for the private investor with cash to invest in the new opportunity funds. Bad for most of us i.e. the private investor with his investments currently tied up with a larger property fund or in a pension.
To date the banks and funds have resisted a "fire sale" but they will have to do exactly that very shortly. I believe that it will only be after the effects of the credit crunch are fully played out will we see the true extent of it from our pockets.
Unfortunately I can't see any relief this year for Banks. Mainly because the lack of liquidity has yet to completely filter down the chain to the retailers and manufacturers and small to medium sized companies. Staff at Banks are starting to get laid off but how many in your office? not many yet, I guess, but they will not escape the effects of this market adjustment.
Once it starts to filter down to companies their employees and customers they won't be able to pay their loans rent/mortgage,exacibating the Banks' and individual homeowners current problems and forcing sales of both residential and commercial property.
What can you do? Look for opportunities to purchase residential or commercial property either directly or indirectly (through opportunity funds) in the coming months but only at a significantly discounted rate from current comparables.
Only once the inflated property valuations from last year are assigned to history and true long term market valuations are established on commercial and residential property will we be able to say the crunch is over.
Please remember Steelbee just tells it how he sees it and the blog has no vested interest in any organisation.By the way check out these cheap ebooks
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