Systemic risk concerns grow among money managers
NEW YORK: Fears of a systemic credit event are growing among fund managers as alarms sound in property markets around the world.

About one in six of those polled considers such a crunch to be the biggest tail risk facing markets, compared to about one in 11 in December, according to Bank of America Corp’s (BofA) latest Global Fund Manager survey.

The deepening disquiet in US commercial real estate (CRE) and Chinese property markets means it’s now the third-biggest worry for respondents, lagging higher inflation and geopolitics.

Hopes that the Federal Reserve (Fed) would cut interest rates and alleviate some of the pressure on real estate were dented by stronger-than-expected inflation numbers last week.

Traders are now wagering on less than 90 basis points of cuts this year – almost half of what was expected in January.

Meanwhile, more than US$900bil of debt on US commercial and multifamily real estate will require refinancing or property sales this year – a 40% jump from an earlier estimate – after banks extended loans among other factors, and as building values fall.

Smaller banks seem to be on a trajectory toward 8% to 10% default rates in their CRE loan books, warned Bruce Richards, chairman of Marathon Asset Management, in a LinkedIn post this week.

Those lenders are particularly vulnerable to the downturn in CRE after ramping up their exposure in recent years. By contrast, bigger banks “are as strong as the Rock of Gibraltar,” Richards said by phone.

A 10% default rate on CRE loans would result in about US$80bil of additional bank losses, according to a research paper on US bank fragility published in December.

The paper warns that CRE distress could leave more than 300 mainly smaller regional banks at risk of solvency runs.

“We will continue to see upticking levels of distress,” said Omar Eltorai, director of research at data provider Altus Group.

“It’s one of those variables that people can call early but there’s a delay before it passes through,” he said, adding that this can sometimes be measured in years.

For now, the Fed is coordinating with lenders with concentrated CRE exposure on a plan to work through expected losses.

While the losses are a concern, US regulators are trying to ensure that loan-loss reserves and liquidity levels are adequate to cope, Treasury Secretary Janet Yellen said earlier this month.

Still, nearly 40% of fund managers see US CRE as the most likely source of a credit event, the BofA survey found, with a further 22% seeing Chinese real estate as the biggest threat.

The survey took place from Feb 2 to 8, just days after New York Community Bancorp slashed its dividend and stockpiled reserves, in part because of weakness in the office and multifamily markets.

The turmoil has since spread to German lenders with exposure to US CRE. Bonds of Deutsche Pfandbriefbank AG have fallen further into distressed territory. — Bloomberg
Property
NEW YORK: Fears of a systemic credit event are growing among fund managers as alarms sound in property markets around the world.