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(Bloomberg) — Concerns about a systemic credit event are growing among fund managers as alarm bells sound in real estate markets around the world.
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Roughly one in six people surveyed believe such crises are the biggest tail risk facing markets, according to the latest Bank of America Corporation Global Fund Managers survey. , as of December, it was about 1 in 11 people. This means that growing uncertainty in the U.S. commercial real estate and Chinese real estate markets is the third biggest concern for respondents, behind rising inflation and geopolitics.
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Better-than-expected inflation data this week dampened hopes that the Fed would cut interest rates and ease some of the pressure on real estate. Traders are now betting that interest rates will fall by less than 90 basis points this year, about half of what they expected in January. Meanwhile, more than $900 billion in U.S. commercial and multifamily real estate debt will need to be refinanced or sold this year, an increase of 40% from previous expectations as banks expand lending and building values decline. It is expected to increase by %.
Bruce Richards, chairman of Marathon Asset Management, warned in a LinkedIn post this week that default rates on small banks’ CRE loan books are trending toward 8% to 10%. These institutions are particularly vulnerable to downturns in CRE after increasing their exposure in recent years. By contrast, the big banks are “as strong as the Rock of Gibraltar,” Richards said by phone.
A research paper on U.S. bank vulnerabilities published in December found that banks would suffer approximately $80 billion in additional losses if CRE loan default rates reached 10%. The paper warned that CRE’s financial crisis could put more than 300 mostly small regional banks at risk of insolvency.
“The level of distress will continue to rise,” said Omar Eltrai, research director at data provider Altus Group. “This is one of the variables that people can determine early on, but there is a lag before it passes,” he said, adding that this can sometimes be measured in years.
Click here to read our article on the CRE debt crisis
For now, the Fed is coordinating with financial institutions with concentrated CRE exposures and plans to address expected losses. Treasury Secretary Janet Yellen said earlier this month that while losses were a concern, U.S. regulators were working to ensure loan loss reserves and liquidity levels were adequately addressed.
Still, we found that nearly 40% of fund managers view US CRE as the most likely source of credit events, with a further 22% seeing Chinese real estate as the biggest threat. The survey was conducted from February 2 to 8, just days after New York Community Bancorp cut its dividend and reserves due in part to weak office and multifamily housing markets.
Read more: NYCB’s talks with watchdogs lead to market-shaking moves
The turmoil then spread to German financial firms with exposure to US CRE. Deutsche Pfandbriefbank’s corporate bonds fell further on Thursday after S&P Global Ratings downgraded the bank, citing high exposure to troubling markets.
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1 week review
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The wave of money pouring into credit markets is acting as a shield for investors against any negative scenario, including even the prospect of fewer central bank interest rate cuts than ever this year.
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After nearly two years of cuts, U.S. banks are starting to step up purchases of everything from mortgage-backed securities to loan-backed securities.
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Insurance products that consumers use to finance their retirement are selling at record levels, boosting demand for corporate and commercial mortgage bonds.
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Insatiable demand for high-quality bonds in the United States is prompting investors to shrug off the anxiety associated with risky exposure to New York Community Bancorp real estate.
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JPMorgan Chase & Co. beat private lenders to provide approximately $2.5 billion in debt financing to support Cohesity’s planned acquisition of Veritas Technologies.
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Logan Group has bought more time to move forward with its debt restructuring plan after a Hong Kong court rejected a creditor’s petition to liquidate the Chinese development company’s two main units.
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Another Chinese developer, Red Sun Property Group Ltd., has received a liquidation petition filed by Bank of New York Mellon in a Hong Kong court.
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China Nancheng Holding Co.’s bonds plunge at a record pace after the company defaults on its dollar-denominated bonds for the first time, reflecting fresh concerns about the extent of government support for the struggling sector are doing.
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Bristol-Myers Squibb sold $13 billion in bonds to finance its acquisitions of Karuna Therapeutics and RayzeBio, in a deal worth more than $85 billion.
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Siemens AG has sold Europe’s biggest corporate bond offering in a year following a credit rating upgrade.
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The banking group has launched a $5 billion leveraged loan sale to help finance KKR&C’s purchase of Cotiviti shares.
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Citigroup has hired JPMorgan Chase & Co. veteran John Witherspoon as a managing director in its real estate investment banking team.
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Alberta Investment Management Corp., one of Canada’s largest pension plans, is opening a New York office to further develop its private credit investments.
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Newmark Group Inc. has hired Matthew Featherstone to head its debt and structured finance business for the UK and Europe.
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S&P Global Ratings has hired former Schroders senior investment director David Knutson to replace Gerald Painter, who is retiring at the end of this month.
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