BEREL Sunday International Investing Edition

Wells Fargo Turns to Ireland for Loan Portfolios

In a $1.4 billion deal, Wells Fargo has won the Bank of Ireland’s U.S. commercial-real-estate loan portfolio as the Irish bank attempts to deleverage its assets. The portfolio consists of 25 loans sold at close to face value and backed primarily by properties in New York, Boston and Washington[1]. The Bank of Ireland was ordered by Ireland’s financial regulator to deleverage by cutting the lender’s loan portfolio by $43 billion by the end of 2013. Wells Fargo also purchased an additional $1 billion in loans from Allied Irish Banks earlier this year and is now taking aim at a $9.5 billion portfolio of loans in the offing from the Anglo Irish Bank Corporation. The latter includes commercial “trophy properties” in New York City and Chicago.

JPMorgan Chase and Bank of America are also after the Anglo Irish Bank portfolio and have submitted bids on it[2]. Most of the loans are expected to perform through maturity. The sale will also be the first of its kind, since “this is the first foreign bank to sell its entire U.S. loan portfolio, and it will be good test of the market,” said head of global real estate practice at law firm Greenberg Traurig, Robert Ivanhoe.

Do you think it’s a good thing that American lenders are buying back American loans, or should they be doing other things with these billions of dollars?

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German Real Estate Trusts Gain Momentum

Despite the fact that there are only four German real estate investment trusts (REITs) in existence, international investors are eager to get involved in this European investment vehicle[3]. With much of the global economy struggling from various financial crises, the German economy – and real estate in particular – is experiencing increasing demand. The German real estate market has been depressed for several years, but now appears to be on the upswing with properties appreciating noticeably and reliably. And investors are taking notice and getting involved, with one existing REIT’s initial public offering (IPO) performing extremely well and causing Wall Street Journal’s economist Laura Stevens to “shine a spotlight on the Germany real estate market”[4].

Analysts believe that a major factor in the German real estate market’s growth potential is that “the German government…is taking really good care of Germany.” Interestingly, this does not mean that the government is over-regulating the market or creating artificial growth. Instead, it means that the land is being cared for, crime levels are extremely low, the free market is being allowed to establish a natural demand that is growing and investors have great flexibility in the ways that they can invest in real estate to make money.

Think our government could learn something about dealing with the real estate market from the Germans, or do you believe there is there more to this than meets the eye?

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Chinese Government Tightens Credit Access Further

In an effort to “take some of the air out of [China’s] property bubble,” the Chinese government will be tightening access to credit in the coming months[5]. The real estate and development industries in China are likely to suffer in the process as well as the wider economy in the region. Chinese banks have been extremely limited in the volume of real estate development they could fund for some time, but a uniquely Chinese investment vehicle, trust companies, had taken on much of the shortfall in real estate development lending. Now these “funnels” for funds from wealthy private individuals and companies will also be constrained when it comes to real estate lending. All deals will go through a regulator, allowing the China Banking Regulatory Commission (CBRC) to “quash a deal in advance,” say experts in the field.

In the first half of this year, Chinese trusts invested 207.8 billion yuan in the real estate sector despite regulatory restrictions on funding the housing and development industry[6]. The trusts were able to charge high interest rates since they have become, essentially, the only source for real estate development funding in the country. “Now we are not seeing anything less than 18 percent [interest rates]” on property loans from trust firms, said Jason Bedford, a financial advisory services manager at KPMG, an investing firm based in the United States. And while this has been great for investors, it also has centered the source of financing around these trusts. Now, “a crackdown by the banking regulator would result in an even bigger correction for the property sector,” said Jinsong Du, a Credit Suisse property analyst. The CBRC will not formally comment on whether or not its policies have changed regarding the trust sector.

Many economists are calling China one of the “only bright spots” in the global economy. Do you think that this will change if the Chinese government succeeds in bringing down construction and regulating its way out of the current real estate bubble?

Thank you for reading the Bryan Ellis Real Estate Letter!

Your comments and questions are welcomed below.