When New York real> estate giant Tishman Speyer and asset manager BlackRock (BLK)
Singapore s sovereign wealth funds has lost at least $100 million in the deal. The blow served as another stark warning about the interconnectivity of global economies in peril.
In 2006, the Tishman-BlackRock joint venture bought the Stuyvesant Town and Peter Cooper Village apartment complexes from insurer MetLife (MET)
It's further proof that bubbles can spawn bad investment decisions among even world class professionals with great track records. The Government of Singapore Investment Corp., or GIC, is out $100 million from its investment in a $575 million loan made to the purchasers. The deal adds to the fund s 20% drop in assets for the fiscal year ended March 31.
The GIC, which declined to comment for this story, remains among the world's top sovereign wealth funds, which in total control about $3.2 trillion in government money. Singapore still has $100 billion under management, but the New York blunder is the latest snafu in a line of global financial players incurring very large, very public losses.
Norway's Government Pension Fund, the China Investment Corporation and most recently Dubai World all lost hundreds of billions of dollars in U.S. real estate and finance during the ongoing financial crisis, says Mike Maduell, president of the Sovereign Wealth Funds Institute in Roseville, Calif.
"They all looked to extend their investments in American real estate assets over the last several years, and in most cases their investments were made at the height of the market," he says. "The Manhattan real estate market was going up like crazy."
So why can t the world s top professional investors can't get the "Buy low, sell high" axiom right?
"There's something called the winner's curse," says Mark Pibl, managing director at NewOak Capital and head of the high yield and leveraged loans business at the New York firm, which advises investors on the valuation of mortgage debt and structured products. "You have to pay a premium to win the transaction, and you have to give away most of your synergies, your cost savings, to the seller. It's a perennial tug of war, whether it's a buyer's market or a seller's market."
It was certainly a seller's market in 2006, when Tishman teamed up with Black Rock's deep pockets and picked up 11,232 apartments in two vaunted enclaves of middle class Manhattan housing.
Three and a half years later, the buyers said they hadn't been able to carry out their plan of raising rents in the approximately 3,000 apartments whose rent-stabilized tenants pay below-market rates. The new landlords sought to charge as much as $3,300 a month for a two-bedroom apartment, once they'd cleared out the old, low-paying tenants.
It was a sound strategy, but the timing was all wrong. Stuyvesant Town s buyers acted as if the increase in the rent rolls was plausible, but they, like many other players, didn t count on the end of cheap money. So they were left with few options for refinancing their debt when litigation snarled their efforts to raise rents.
You had lots of highly leveraged deals in play, says Maduell. But things started to crumble and you didn t have the cash flow there.
Independent housing analyst Jack McCabe says the default should also serve as a clarion call for the next wave of financial trouble in commercial real estate, a looming market crash with world-wide implications.
"We are going to see commercial mortgage-backed securities failures start to accelerate in 2010," he warns. "They don't realistically know the values of these CMBS funds, and the ratings by Standard & Poor's and Fitch Ratings and Moody's have proved to be less than accurate. Now these projects are going to need to be refinanced, and in most cases the underlying real estate asset, or loan portfolio, or bundle of mortgages is worth less than half of what the debt is. These developers don't have the cash to make up the difference."
Although Fitch downgraded the Stuyvesant Town deal in August and October, the loan is now in the hands of a special servicer, a sort of last-ditch entity assigned to try to wring money out of a loan in default. On Wednesday, an investment group led by Winthrop Realty Trust which holds about $300 million in senior mezzanine debt, announced it intends to pursue rights and remedies including a foreclosure sale.
Stuyvesant Town was a big bet, and a big bust, and it highlights the risks inherent in big money deals, Pibl says. "Do not attempt this investment at home," he says.
But take heart, individual investors. Wall Street and the titans of global finance usually hold better cards, but sometimes the deals you can't get into will save you money.