Thursday, 26 March 2009

Citigroup's Latest Con: Commercial Real Estate Fine

One of the next big shoes to drop in the global asset price collapse is commercial real estate. Citigroup, of course, still appears to be carrying its commercial mortgage portfolio at par dreamy levels. (Goldman Sachs)

What is commercial real estate? It's a $6.5 trillion market financed with $3.1 trillion of debt (Real Estate Roundtable, as quoted in WSJ).

Deutsche Bank estimates that commercial real estate prices will fall 35%-45%. That will make commercial real estate a $4 trillion market financed with $3.1 trillion of debt.

The main problem with commercial real estate debt, meanwhile, is not default risk but refinancing risk. Over the next few years, hundreds of billions of loans will come due, and banks won't be quick to refinance them again. As in residential real estate, lending standards have tightened and collateral prices--the real estate--have dropped.

Citigroup has already dumped $20 billion of its commercial real estate risk onto the taxpayer in one of its many bailouts. But it still has $38 billion left. The company has been rapidly increasing loan-loss reserves, but we'd guess not nearly fast enough.

Knowing what you know about Citigroup, what do you think the odds are that Citi has adequately reserved against its commercial mortgage portfolio?

By the way, Bank of America (BAC) and JP Morgan (JPM) are both carrying their commercial mortgages at 100%, too. Wonder what their reserves look like.

Here's more background on the Commercial Real Estate implosion from Richard Parkus at Deutsche Bank:

Deutsche Bank Commercial RE Q1 2009
Source: Business Insider

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