By Sinead Cruise
LONDON, March 17 (Reuters) - General Electric Co. <GE.N> is
facing bleak returns twice over from ill-timed investments in
European real estate markets.
The U.S. conglomerate's GE Capital financial arm spent
billions of dollars in Eastern and Central Europe between 2005
and 2008, becoming one of the biggest buyers late in the
property cycle just when prices were peaking. []
And the value of discounted loans it bought from other
investors in 2007 and 2008 has also plummeted.
"With commercial real estate values down sharply from 2007
peaks, GE Capital could still experience sizeable losses on (its
real estate) portfolio over the next two years," said Nicole
Parent, an analyst at Credit Suisse.
"GE is unlikely to extend loans that have eroded, which
should result in an increase in losses for this portfolio well
in excess of its current reserve of $300 million."
Worries about GE Capital -- the conglomerate's financing arm
that also has a consumer credit business -- are weighing on GE's
share price, and the group is now trading lower than rivals
without such financial exposure. []
The unit's real estate portfolio -- worth an estimated $144
billion, $60 billion of which outside the United States -- is
taking centre stage as analysts scour the company for any
troubles following its credit rating downgrade last week.
A New York-based spokesman said GE would reserve comment on
its funding and its real estate strategy until after GE Capital
presents to the market on Thursday.
DEBT DABBLE
Few opportunistic investors have doled out cash on European
real estate debt on the same scale as GE so early in the
deleveraging cycle, said Jonathan Short, joint head of property
investment management firm Internos Real.
"People are still on the sidelines either because they
haven't been able to secure adequate investor support for the
strategy or because they feel risk has not been fully priced in
yet," Short said. "They would certainly argue big debt buys
before now were premature," he said.
Sharp drops in the price of European commercial
mortgage-backed securities (CMBS) in the past year lend strong
support to this "wait-and-see" strategy.
In its 2009 Global Securitisation Annual, Barclays Capital
said spreads on most European CMBS had widened to unprecedented
levels in the first half of 2008, reflecting weak demand and
assumptions of poorer repayment prospects.
Trading on even the strongest AAA rated CMBS tranches ranged
between low-to-mid 50s of par up to mid-80s of par, Barcap said,
a spread so wide that it is expressed in percentage of par
rather than usually narrower basis points spreads.
GE's bricks and mortar investments are also endangered by
Europe's limp economic outlook, particularly those in ailing
economic powerhouses of central and Eastern Europe.
GE invested billions of euros in a welter of deals between
2005 and 2008 -- with several big ticket purchases struck just
as a European property bubble burst in summer 2007.
"You have to look at the correction in Europe as a rolling
wave. Everybody who hasn't yet felt the force of it, should
assume they will at some point," Marc Mogull, head of private
equity real estate firm Benson Elliot told Reuters.
"We will be stuck in this muck for a long time. One of the
worst things in an investment market is when people with money
see no urgency to buy. That's where we are now," he said.
According to property broker King Sturge, average commercial
property prices in large swathes of Eastern Europe will drop by
double figures this year, with maximum price falls ranging
between 18 percent in Turkey to 35 percent in Slovakia.
Prices could fall by 20 percent in the main business centres
in Romania and the Czech Republic, 25 percent in Poland and
Serbia and 30 percent in Hungary, King Sturge said.
Analysts broadly expect GE to mount a slick charm offensive
on Thursday to convince investors any further trailblazing in
the global real estate market would fuel, rather than burn
shareholder returns over the longer term.
"Investors will be looking for clarity and reassurance from
GE on the fundamentals supporting these investments -- the
strength of the underlying tenants and the credit profiles of
the borrowers," Short said.
"But one thing you can be sure of is that that debt is going
to be worth less than they originally paid for it two years ago,
because virtually everything in real estate is worth less than
it was two years ago," he said.
(Editing by David Cowell)
