Sunday, June 29, 2008

Smart equity, dumb debt?

I liked this writeup of a recent distressed real estate conference in Vegas.
Aside from say multi-family and really solid income producing properties (producing solid verifiable income now, not projected income) there is no debt available. There is lots of equity looking for 20% and up returns. Since these will have to be largely unleveraged, the asset price required to deliver the return is abysmally low. Further driving down implied valuations is the fact that the equity is Wall Street money with 3 to 5 year time horizons. No one thought that was achievable (with the exception of the Wall Street boys in the audience, of course).
Be sure to read a follow-up piece here. What interested me was the comment that these is lots of equity sitting on the sidelines, waiting for prices to be right before moving back in. I think this is exactly right. There is a huge amount of money looking for safe investment opportunities (as it runs from US treasuries to mortgage backed CDOs to commodities) and it is ready to step in when prices are right. The problem is that the right prices would reveal that the US banking system is insolvent, and arguably significant chunks of the US as well. The Fed and Treasury are in a difficult place as they try to lower prices enough so this money steps in, without actually revealing that the financial system as a whole, if it recognizes its losses, is at zero equity.


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