Commercial real estate (CRE) spreads continued to narrow this week. AAA rated tranches continue to trade in a choppy (seemingly) directionless market. But big improvements are evident in the lower rated BBB tranches.
(These narrower spreads are another reason to avoid leveraged ETF funds such as SRS. If you are bearish on CRE then stick w/shorting individual REITs or even the non-levered ETFs such as IYR).
Source: Markit CMBX Indices http://www.markit.com/information/
Institutional funds have begun to turn bullish on this sector w/comments such as this:
Richard Carswell, business development manager at OPM, which runs a multi-asset property fund, said restrictions on investors removing money from property vehicles had "artificially propped up" bricks and mortar valuations.
He said: "In any future general recovery in sentiment towards property, bricks and mortar will struggle to perform, while Reits, trading as they are on huge discounts to NAV, will substantially outperform bricks and mortar."
But Howard Meaney, head of property investment at LV=, said although losses for 2009 would total 10-15 per cent, declines could reverse in 2010 and recovery could begin in 2011.
How can this be? Commercial real estate spreads narrowing in the face of extremely bearish fundamentals?
But Jeff Bernstein, Urbandigs.com writer and all around real estate savant, has an alternate theory which he pens in an excellent article, "Loan Extensions - Bridge to Nowhere?"
Stalling tactics! Everywhere I look I see them. The Fed accepting shakier and shakier assets as loan collateral, mortgage forbearance programs and, increasingly, bank loan extensions. In fact, the whole TARP/TALF/PPIP monstrosity embodies it.