A report from CNBC. “There’s a ‘big risk’ of real estate companies filing for insolvency when interest rates rise, said Nils Kuhlwein of consulting firm Kearney. The real estate sector had the highest absolute number of ‘zombie’ companies and the highest share of zombies in 2020, according to a Kearney report — and that number could surge if rates double, said Kuhlwein. Zombie companies refer to firms that have been on the market for more than 10 years and earn enough to operate, but not to pay the interest on their debt.”
“Nils Kuhlwein pointed out that the global financial crisis of 2008 started with a real estate and housing price bubble and mortgage defaults in the United States. ‘What we are now seeing again, 13 years later, is that again, the real estate sector has the highest share of ‘zombies,’ he told CNBC.”
From Barron‘s. “Opendoor Technologies was falling on Wednesday after BofA Securities took a bearish view on the real estate platform despite growing revenue. It’s the iBuying model the analysts don’t like. BofA analyst Curtis Nagle initiated coverage on shares of Opendoor at Underperform with an $8 price target. iBuying is seen by Nagle as an ‘inherently risky and largely untested business model that carries low to negative margins and requires high debt to finance transactions,’ he wrote in a research note.”
“The ratio of purchased to sold homes rose to nearly 3-to-1 in the third quarter even as the housing market started slowing down in late 2021. Home prices have been falling and existing home turnover is expected to turn negative in 2022 after two strong years, said Nagle, adding to the list of factors overshadowing the company’s growing revenue and a high potential for shares gains. Opendoor shares have declined more than 50% since rival Zillow’s exit from iBuying, signaling markets’ hesitancy in betting on the home-flipping business.”
From Investor Place. “Some business ideas are bold; others are just bone-headed. Not to pick on Zillow Group, but the company should have stuck to its core business instead of exposing ZG stock holders to a doomed foray into house flipping. Not long ago, the company practically admitted that it had screwed up. This might seem honorable, and it may be tempting to be a hero and conduct a rescue mission with beaten-down ZG stock. Yet, your role as an informed investor isn’t to be a hero. Zillow Group’s loss isn’t your gain, as a botched business venture isn’t commendable and some sinking stocks should simply be left alone.”
“In early November of last year, KeyBanc analyst Edward Yruma made a crucial observation. He noted how most of the homes that Zillow Group had purchased, with the intention of flipping them for a profit, were now worth less than what the company had paid for them. After analyzing 650 homes in Zillow’s inventory, Yruma found that 66% were listed below the purchase price, at an average discount of 4.5%. In other words, around two-thirds of the company’s home investments were underwater.”
The Sun Sentinel. “Buying a condo in an older South Florida high-rise? For people who want to finance their deal, it’ll be getting tougher to take out a loan backed by Fannie Mae or Freddie Mac, the government-sponsored enterprises that make mortgages available to low- to moderate-income borrowers. Generally, they will not back loans for condo and co-op units if their buildings have put off major repairs, industry experts say. The rules could make it harder for some owners to sell.”
“In an emailed response to questions from the South Florida Sun Sentinel, Fannie Mae suggested that the Surfside disaster was emblematic of a national problem. ‘While the temporary requirements were put in place in the wake of the tragic collapse of the Champlain South Tower in Surfside, residential buildings with aging infrastructure and significant deferred maintenance are a growing concern across the nation,’ Fannie Mae said. ‘This concern is expected to increase over the next decade, as the majority of residential condo and co-op buildings were built more than 20 years ago.’”
From Bisnow. “One trend has become increasingly clear: Tenants are leaving older buildings in favor of newer projects. This accelerated shift has left owners of some aging office buildings with large vacancies and insufficient cash flow to pay back their debt, putting billions of dollars of office-backed loans at risk. ‘The problems going forward are going to come from primarily markets that have sizable amounts of dated properties that are not particularly desirable to big drivers of demand these days,’ Trepp Senior Managing Director Manus Clancy said. ‘You’ll see episodes in New York, Chicago and other places where big buildings that back loans with nine-figure balances become distressed.’”
The Advocate in Louisiana. “Nearly a year and a half after Hurricane Laura ripped through downtown, the biggest office tower in Lake Charles still sits vacant and in ruins. Officials are grappling with the idea of whether the Capital One Tower will have to be razed and what that could mean for the city. Lake Charles Mayor Nic Hunter and others say they believe it was never fully occupied, raising questions over whether bringing it back in the same form would be viable.”
“‘I know that there was probably half of that building that wasn’t being utilized. Without it being there, what does happen to our skyline?’ asked Chelsea Boudreaux, who owns the downtown coffee shop Stellar Beans with her husband and lives in a nearby historic district.”
From Socket Site in California. “Purchased for $9.75 million in August of 2016, the interior of the fully renovated Nob Hill home at 1230 Sacramento Street has since been made over. The sale of 1230 Sacramento Street has now closed escrow with a contract price of $7.7 million, which was officially ‘within 4 percent of asking’ according to all industry stats and aggregate reports but down 21 percent ($2.05 million) from its value in the third quarter of 2016.”
From News.com.au. “A Tasmanian family are devastated after a major Australian home building company collapsed, leaving them thousands of dollars out of pocket and almost homeless. Nathan Meyers describes the experience with Hotondo Hobart as having destroyed dreams. ‘It puts your relationship under immense strain and we were fighting all the time, as you have no other outlet, and it’s more than the financial impact, it destroys all your dreams and hopes and you don’t know what to do and you question your decision.’”
“‘I will be working for next 30 years to pay off the house and will retire at 74 or 75 maybe. I’m going to be working the rest of my life because one builder couldn’t run a business,’ he said.”
From Vietnam.net. “Soon after the Prime Minister sent a telegram to relevant ministries, branches, and localities to review and correct the ongoing land auctions, the Ministry of Construction sent a document to the People’s Committees of related provinces and centrally-run cities to control the high risk being created by real estate bubbles and to further strengthen the management of the real estate market.”
“Ms. Nguyen Thanh Huong, General Director of Van Phuc Land, said that the real estate fever in the past should be a warning. In the situation of a prolonged pandemic, people are facing grave difficulties, but this current real estate fever is difficult to understand. Mr. Binh, an apartment investor in Ho Chi Minh City, shared that he has invested in two apartments in the Celadon urban area project in Tan Phu, which is very far, and each apartment was closed at around VND 2 bn. Since Tet is approaching, he wants to sell these apartments with a mark-up of VND150 million per apartment. However, for more than a month now, there have been no customers.”
From Bloomberg. “China Aoyuan Group Ltd. won’t make payments on four dollar bonds and said that will trigger defaults on all other offshore debt, becoming the latest Chinese developer to succumb to the industry’s liquidity crisis. The company won’t pay off a dollar note that matures Thursday or a separate bond due Sunday, it said in a Hong Kong stock exchange filing late Wednesday. The notes have a combined $688 million of principal outstanding, according to data compiled by Bloomberg. The builder also said it wouldn’t pay interest before the end of a 30-day grace period on two other notes.”
“‘Events of default will occur (or have occurred) under all other offshore financial indebtedness of the group,’ Aoyuan said in the statement. Aoyuan made the decision not to pay the debts ‘to preserve its limited cash resources and maintain fairness among all of its creditors pending a holistic debt restructuring,’ it said. It was ranked 37th by sales among Chinese developers last year, according to China Real Estate Information Corp.”
“‘The continued market downturn and the dampening of purchasers’ confidence have caused difficulties for the group to realize its inventories and dispose of its assets on reasonable terms,’ it said.”