Despite Capital, Uncertainty Dogs Commercial Real Estate -Pimco
June 18 2010 - 9:09AM
Dow Jones News
Even as capital returns to commercial real estate, fundamental
problems such as unemployment and uncertainty over property prices
are likely to hamper recovery, according to a detailed analysis of
this segment by Pacific Investment Management Co.
The bond investment company, a unit of Allianz SE (ALIZF,
ALV.XE), undertook a comprehensive study of commercial real estate
similar to its overarching analysis of the housing market in 2005
that led to its prediction of a crash. For the latest study,
Pimco's Investment Committee dispatched folks to 10 cities and met
with more than 100 market participants to gather data.
"Commercial real estate shares most of the sins of its
residential cousin--extremely weak underwriting, excessive leverage
and absence of risk management from both banks and rating
agencies," the study said.
Its key findings include:
--Capital has returned to commercial real estate. "But optimism
should be tempered, because national price indices are misleading
when transactions are limited and fail to reflect the significant
uncertainty around property valuations," the report said.
--The transfer of commercial real estate risk out of the banking
system may take longer than previous cycles, and as a result,
prices won't return to 2007 levels only toward the end of this
decade.
--Macroeconomic factors such as unemployment will affect the
outlook for rents, vacancies and capitalization rates.
Pimco suggests there are opportunities for patient investors as
the deleveraging continues. Some of the options include
dispositions of the assets of banks taken over by the Federal
Deposit Insurance Corp., restructuring of large commercial loans
and buying discounted subordinate positions in commercial
mortgage-backed securities.
-By Prabha Natarajan, Dow Jones Newswires; 212-416-2468;
prabha.natarajan@dowjones.com
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