CNBC Squawk Box – Europe – The Reality of Real Estate
June 2, 2009
Transcript:
Geoff Cutmore - And the irony is that he thinks that we may have inflation coming back even as he believes that the banking system and the property companies are going to face further problems on the decline in the value of assets. Well now Ferguson’s comments echo the Chairman of the investment firm, Blumberg Capital Partners, who says the U.S. banking system will hit more problems over the next few years when $1 trillion worth of commercial real estate loans will come up for refinancing. Let’s talk to the man, Philip Blumberg is with us and he is Chairman of that business. Good to see you this morning.
Philip Blumberg – Good to see you. Nice to be with you.
Geoff Cutmore - You seem to have very astute timing with your commercial real estate investments.
Philip Blumberg – I think if you didn’t have astute timing you probably weren’t being loyal to your investors. To be candid, the credit crunch which has fueled this, I agree with Will, the credit crunch has fueled this precipitous decline and if you didn’t feel the credit crunch and if you didn’t feel the credit crunch as a real estate investor in advance, you probably were looking at fees and other things to motivate you to stay in and that’s just not good business and that’s not treating your investors well.
Geoff Cutmore -So you liquidated the Funds?
Philip Blumberg – Yes
Geoff Cutmore - And you are sitting on money. What are you intending to do? I mean commercial real estate is your thing? So one assumes that that’s the asset class that you are going to reinvest in.
Philip Blumberg – We do and we see a lot of opportunity. Right now, it’s about addressing the credit freeze. It’s buying distressed debt and it’s actually issuing new loans. There’s a credit crunch that there is no participation by the financial system in refinancing. So issuing new loans, bridge loans it’s the same drill down of the underlying asset but we’re providing capital in the form of debt. And that is clearly one of the areas that right now we can be active in.
Louisa Bojesen - Who are you issuing the new loans to? And what are your rates? I mean how are you….
Philip Blumberg – Well the rates right now, they are very high. They are 7-11% and those are for good credit borrowers. We’re issuing loans at lower loan to value. Much lower than what we think is prudent in terms of buying a property. The reality is that the folks that we can refinance are those that have paid excessive in a peak market for properties but have the cash to make up the difference. So that means they’re credit worthy in the context of cash and we attach other collateral because we don’t believe that the credit crunch is over. And clearly as we see job loss, it will affect the commercial market but there’s a lot of opportunity and we are also bullish on the U.S.
Will ___ – Very interesting. I think it’s a question of refinancing has not been picked up enough.
Philip Blumberg – Absolutely.
Will – It’s really, you know the amount of asset backed paper that was issued in the United States and indeed, in the UK in the property market was huge. I mean we’re talking…what kind of numbers are we talking? We must be talking a good $1 trillion dollars, or even $2 trillion dollars. And this stuff is coming for refinancing over the next 2 to 3 years and how is that going to be refinanced?
Philip Blumberg – It’s difficult to refinance in a credit crunch, but it’s also difficult to refinance when you bought at peak market and you lay around 80-85% financing. It’s irresponsible.
Will – Tell me now, where is that money going to come from and how is the United States going to refinance all this maturing asset backed paper over the next 2 to 3 years? What’s the story? How’s it going to happen?
Philip Blumberg – It’s going to happen through write-downs. It is going to have to happen by deleveraging our economy. That’s painful. But if we don’t de-lever we are a bloated economy, a global economy. If we don’t de-lever, we don’t take write-downs, if people don’t suffer for mistakes quickly, this thing is going to last for a very long time and our recovery will not be as strong as it should be. So it is going to have to come in the form of write-downs and banks are going to have to take the write-down and it’s going to be painful and that is the other shoe to drop.
Geoff Cutmore – Well when does that shoe drops because it strikes me that all the administration has done is try to prop up the prices of these assets and we still don’t have capitulation on the part of the sellers and there’s no real, well you can take me up on this if you want, but my sense of the honesty that’s coming out of the banking system in the U.S. is still that its patchy. I’m not getting a frank expression of the real problems.
Will – I accept that it’s not very good, but my goodness it’s much better, I mean there is a huge issue in Germany and we’ll come to that in a minute.
Philip Blumberg – Well the honesty in the banking system is that at supply with new capital and they are still not making new loans. Implied in that is we got to save this capital for the write-downs that will be coming forward. And yes, I do think that the administration well intended, is keeping a patient moderately ill for too long, instead of letting us get sick in an economy quickly to recover. I think we’d be far better off.
Geoff Cutmore - But you have a better sense of the commercial property market timing than I guess anybody else that sat around the table since this is your sector. At what point does the grieving period end and you get capitulation on prices?
Philip Blumberg – Capitulation should start occurring next year. The large loan refinancings begin in 2010. So as those refinancing occur you’ve got to get out of a state of denial. And we’ll see the bid ask margins start to tighten in terms of property sales and in terms of discounts to loans.
Louisa Bojesen – So should the FED be increasing its buying the ofn the longer dated treasuries then in order to try and bring rates down?
Philip Blumberg – No I think the FED needs to let the world run. I think the Fed is playing a little too much interference in allowing us to go thru a process that we need to right now. You can’t act like an island alone in propping up artificially either yields or companies. We need to go through the deleveraging process and I’m concerned that we’re not.
Geoff Cutmore – Very quickly, you said off air that you are looking now globally for opportunity, where are you seeing the best deals at this point?
Philip Blumberg – Well we’re still seeing them in the U.S. we’re seeing deals in Houston and Dallas we’re we’ve still got an oil economy that is fueling a very strong job growth. We’re looking elsewhere in markets where debt and a good infrastructure exist. Like the UK, in UK the bid ask spread on commercial properties is much more narrow. It is a better property market to buy in today than the U.S. I think next year we will see it echoed in the U.S.
Will – Philip, good work, good business.
Philip Blumberg – That’s the key is good business and that means treating your clients and your tenants well.
Geoff Cutmore – Philip Blumberg, Chairman of Blumberg Capital Partners, thank you for your time this morning.
Philip Blumberg – My pleasure.
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