In New Jersey, lenders to the American Dream mall are heading to court, demanding a $389 million payment on their defaulted debt.
Some 25 miles north, just over the state line with New York, investors are looking to foreclose on one of the country’s largest malls. And across the country in Los Angeles county, the owners of a Westfield mall expect it to be foreclosed if they can’t sell the property.
The collapse of the US mall industry, long hyped by billionaire investor Carl Icahn and other doomsayers, may indeed finally be near. The industry has been shaky for years, of course, but now that interest rates are soaring from record-low levels, lenders are beginning to move aggressively against property owners.
“There’s a cost benefit analysis being done with respect to taking an action now — that they’re preserving more value by acting now rather delaying action,” said Cynthia Nelson, a senior managing director who leads real estate restructuring at FTI Consulting.
All of this marks the start of what’s expected to be a wave of defaults in the wider commercial real estate industry as that jump in borrowing costs causes property values to fall. This time around offices are also in the spotlight as the work-from-home phenomenon leads companies to cut the space they lease.
Short sellers have also begun to circle once again. It’s not Icahn out in front on the bet this time but Bruce Richards, the chief executive officer at Marathon Asset Management.
The Short Bet on Offices Is Starting to Look Like Malls
CMBX indexes are used to short real estate debt
Source: Bloomberg
Icahn bet against malls using derivatives linked to a series commercial real estate indexes known as CMBX. It’s a similar instrument that hedge fund trader Michael Burry, one of the main characters in the movie The Big Short, used to short the US housing market more than a decade ago.
But Richards says the mall CMBX trade’s too expensive now. Instead, he’s focused on a more recent version of the CMBX index, Series 13, that’s more heavily tied to office towers. In a recession, the spreads could blow out, he says.
“The better short may be more recent vintage securities with heavy office exposure,” he said.
Richards’ bet comes as borrowers including Brookfield have already handed back the keys to some office properties or are opting to default.
The Gas Company Tower stands at 555 W. 5th Street in Los Angeles. Brookfield defaulted on loans secured by the building, and lenders may foreclose, according to filings
Brookfield Office Properties
“The mall business can provide a preview to the challenges owners and lenders of office buildings may face in the coming years,” said Vince Tibone, a retail analyst at Green Street.
By the Numbers
A Comeback Story Starts to Fizzle
Chinese junk bonds lose steam after 50% rally
Source: Bloomberg Asia Ex-Japan USD Credit China High Yield index
China‘s aggressive steps last year to prop up its battered property sector slowed a wave of defaults by the country’s developers and kicked off a rebound in the value of their bonds. A Bloomberg index of US dollar-denominated bonds issued by junk-rated Chinese companies — a benchmark dominated by distressed developers — gained about 50% from its lows in November through the end of January. The rally has lost steam this month, however, as a slump in housing sales persists, keeping cash tight for the builders. Despite Beijing’s sweeping efforts to inject liquidity into the sector, a number of developers have kept their bondholders waiting until the final hours before grace periods run out on their interest payments, Alice Huang, Jackie Cai and Lorretta Chen report. One builder, Central China Real Estate, remitted funds this week for a $9.75 million bond payment that was originally due Jan. 14.
High Alert
Lenders to Cinven-owned Italian life insurer Eurovita have started to write down €300 million of loans after the domestic regulator suspended management and halted redemptions, pushing the private-equity owner into the spotlight. The saga highlights concerns among regulators and banks about private equity’s ownership model when it comes to companies offering financial products to retail customers.
Lapo Elkann, one of the heirs of the billionaire Agnelli family, reached a deal to restructure the debt of his own fashion company Italia Independent Group. Elkann will inject €13 million, while creditors will write off as much as 90% of their loans.
Lapo Elkann, chairman of Italia Independent Group, gestures while speaking during a Bloomberg Television interview in London, U.K., on Wednesday, Dec. 13, 2017.
Photographer: Luke MacGregor/Bloomberg
US cloud company Avayafiled for bankruptcy in Texas after reaching an agreement with creditors to cut its $3.4 billion debt by more than 75%. Investors led by Apollo and Brigade committed to provide a new loan. The company previously faced the ire of lenders over its lack of disclosures.
Indonesia’s biggest listed construction company, Waskita Karya Persero, is planning to delay a $151 million bond payment due next week to June. The crisis in the Indonesian building sector has drawn comparison with China and Korea.
Adani Group moved to reassure investors’ after a damaging short-seller report accused it of fraud.
While a catchy tune in support of founder Gautam Adani got more than 300,000 views on YouTube, executives had to talk money to convince bondholders the group is not spiraling into a full-blown crisis, Giulia Morpurgo and Finbarr Flynn report.
Money managers were worried that access to public funding markets would get more complicated and incredibly expensive for the group given the extra scrutiny Adani’s empire is now under.
However, Adani’s initial plans suggest that the group doesn’t have to tap capital markets to meet its debt maturities; instead, it can take advantage of private markets, issuing long-dated bonds to an undisclosed group of selected investors.
The ability to access new borrowing is key for a group that embraced the era of cheap debt by loading up with it. In recent years, Adani has tapped international bond buyers for more than $8 billion, while also turning to global banks for at least as much in foreign-currency loans.
Seeking private funding would not be a first for Adani; the Indian conglomerate tapped the US private placement markets on multiple earlier occasions before the short-seller report by Hindenburg Research. Entities related to Gautam Adani have counted the likes of Apollo among its private funding backers. The company has also traditionally had strong support from Gulf-based investors.
Notes From the Brink
Credit Suisse used to be big in trading the debt of troubled companies — but now it has problems of its own to worry about.
The Swiss lender is set to get out of distressed debt trading with the sale of a $250 million portfolio. The disparate assets include a loan to autoparts maker Standard Profil Automotive and claims linked to the insolvency of travel agent Thomas Cook, Giulia Morpurgo and Lucca De Paoli write. The team led by Thomas Mathieson, head of special situations and loan trading in London, could also move over to any buyer.
Exiting the distressed debt business allows the lender to allocate capital elsewhere instead of the relatively higher amounts needed to back troubled loans. It’s a sign of the radical changes needed to fix the lender’s balance sheet and comes shortly after the bank sold its structured product business to Apollo.
— With assistance by Giulia Morpurgo, Lucca De Paoli, Finbarr Flynn, Jeanette Rodrigues, Alice Huang, Jackie Cai, Lorretta Chen, Laura Benitez and Marion Halftermeyer
The Competition Bureau says it’s obtained a court order as part of an investigation into potential anti-competitive conduct by the Canadian Real Estate Association.
The bureau says its investigation is looking into whether CREA’s commission rules discourage buyers’ realtors fromoffering lower commission rates or whether they affect competition in other ways.
It’s also looking into whether CREA’s realtor co-operation policy makes it harder for alternative listing services to compete with the major listing services, or gives larger brokerages an unfair advantage over smaller ones.
The court order requires CREA to produce records and information relevant to the investigation, the bureau said, adding the investigation is ongoing and there is no conclusion of wrongdoing at this time.
CREA’s membership includes more than 160,000 real estate brokers, agents and salespeople.
The association said it’s co-operating with the bureau’s investigation.
In a statement, CREA chair James Mabey said the organization believes its rules and policies are “pro-competitive and pro-consumer” and help increase transparency.
Court documents show the bureau’s inquiry began in June, as the competition commissioner said he had reason to believe CREA engaged in conduct impeding the ability of real estate agents to compete.
The documents note CREA owns the MLS and Multiple Listing Service trademarks and owns and operates realtor.ca, which real estate groups use to list homes for sale.
Websites like realtor.ca are where the public can view home listings, while MLS systems contain data that’s only accessible to agents such as additional information on listings, sales activity in the area and neighbourhood descriptions. Some of this data is not publicly available for privacy reasons.
Access to the MLS system is a perk offered to members by real estate boards and associations.
The Competition Bureau in recent years has been reviewing whether the limited public access to these systems stunts competition or innovation in the real estate sector.
Property listings on an MLS system must include a commission offer to the buyers’ agent, and when a listing is sold, often the agent for the buyer is paid by theseller’s agent, according to the court documents.
They allege these rules reduce incentives for buyers’ agents to offer lower commissions because if buyers aren’t directly paying their agent, they may be less likely to select an agent based on their commission rate.
The bureau alleges the rules also incentivize buyers’ agents to steer their clients away from listings with lower-than-average commissions.
The documents also say CREA’s co-operation policy, which came into force at the beginning of 2024, favours larger brokerages because of their ability to advertise to bigger networks of agents.
The policy requires residential real estate listings to be added to an MLS system within three days of them being publicly marketed, such as through flyers, yard signs or online promotions.
The documents also allege the co-operation policy disadvantages alternative listing services as it’s harder for them to compete on things like privacy or inventory.
Last year, the Competition Bureau said it was investigating whether the Quebec Professional Association for Real Estate Brokers’ data-sharing restrictions were stifling competition in the housing market.
It obtained a court order in February 2023 related to the ongoing investigation, looking into whether QPAREB and its subsidiary, Société Centris, engaged in practices that harm competition or prevent the development of innovative online brokerage services in the province.
Much of the data-sharing activity in question was linked to an MLS for Quebec real estate.
— With files from Tara Deschamps
This report by The Canadian Press was first published Oct. 3, 2024.
TORONTO – The Toronto Regional Real Estate Board says home sales in September rose as buyers began taking advantage of interest rate cuts and lower home prices.
The board says 4,996 homes were sold last month in the Greater Toronto Area, up 8.5 per cent compared with 4,606 in the same month last year. Sales were up from August on a seasonally adjusted basis.
The average selling price was down one per cent compared with a year earlier at $1,107,291.
The composite benchmark price, meant to represent the typical home, was down 4.6 per cent year-over-year.
The board’s CEO John DiMichele says recently introduced mortgage rules, including longer amortization periods, will give home buyers more options and flexibility as the housing market recovers.
New listings last month totalled 18,089, up 10.5 per cent from a year earlier.
This report by The Canadian Press was first published Oct. 3, 2024.
Vancouver-area home sales dropped 3.8 per cent in September compared with the same month last year, while listings grew to put modest pressure on pricing, said Greater Vancouver Realtors on Wednesday.
There were 1,852 sales of existing residential homes last month, which is 26 per cent below the 10-year average, and down 2.7 per cent, not seasonally adjusted, from August.
The board says the results show recent interest rate cuts haven’t yet led to the expected rebound in activity, and that sales are still coming in below its forecast.
“September figures don’t offer the signal that many are watching for,” said Andrew Lis, the board’s director of economics and data analytics, in a statement.
The Bank of Canada has already delivered three interest rate cuts this year to bring its policy rate to 4.25 per cent. With further cuts expected at its next two decisions, including what some banks say could be a half-percentage-point cut, there’s still room for an upward swing in the market, said Lis.
“With two more policy rate decisions to go this year, and all signs pointing to further reductions, it’s not inconceivable that demand may still pick up later this fall should buyers step off the sidelines.”
For now though, there are many more sellers entering the market than buyers.
There were 6,144 newly listed properties in September, up 12.8 per cent from last year, to bring the total number of listings to 14,932. The total number of listings makes for a 31 per cent jump from last year, and is sitting 24 per cent above the 10-year seasonal average.
The combination of fewer sales and more listings left the composite benchmark price at $1,179,700, which is down 1.8 per cent from September 2023 and down 1.4 per cent from August.
The benchmark price for detached homes stood at $2.02 million, up 0.5 per cent from last year but down 1.3 per cent from August. The benchmark for apartment homes came in at $762,000, a 0.8 per cent decrease from both last year and August 2024.
The board says the sales-to-active listings ratio across residential property types was at 12.8 per cent in September, including 9.1 per cent for detached homes, while historical data indicates downward price pressure happens when the ratio dips below 12.
This report by The Canadian Press was first published Oct. 2, 2024.
