Property bubbles and Banks – again.

Update: Aberdeen suspends trading on £580m UK Property fund and cuts price by 17%

So begins an article in Investment Week.

Aberdeen Asset Management has temporarily suspended trading in its £580m UK Property fund as well as reducing the price of the fund by 17%, joining a number of other groups in making property fund adjustments amid a post-Brexit rush to exit the asset class.

In fact Aberdeen are the 7th major fund in just a few weeks to either lock in their investors, not allowing them to get their money out, or to allow it but at a heavy discount.  Before Aberdeen we have already had:

Standard Life –  Aviva – M & G – Henderson – Columbia Threadneedle and Canada Life

All have suspended trading in a large property fund. Standard Life also cut the valuation of the fund by 15%. And that sudden re-valuation, a mark to market is the headline.

When one fund says its property assets are actually worth 17% less today than yesterday, that means every single investor in every single fund now faces that same loss. Every one of those assets that is being used as collateral for a loan or for margin trading is now worth 17% less. Trading on margin simply means that instead of using your own money to trade, you borrow money and pledging or ‘post’ collateral to underpin it with your lender. But when your collateral is considered to have fallen in value your lender makes a ‘margin call’ which means they require you to pledge more collateral to make up the shortfall. In this case an additional 17%.

Where do you get that money from? Well some will have to sell assets to make up the difference. But those assets, if they are property, might well also be suddenly worth 17% less. And if lots of people try to sell, to meet margin calls, the price might go down further.

So Funds like Aberdeen are warning their investors not to trip this booby trap.

If they insist on getting out anyway, you have a run.

Which would spread because its not just funds that hold lots of property assets or loans underpinned by them.  This from a Soc Gen study via Zerohedge  (CRE is Commercial Real Estate)

RBS exposure to CRE is GBP 26b, equivalent to 63% of tangible equity
Lloyds 2nd most exposed at 46% of tangible equity, Santander 3rd at 24%, Barclays 4th at 23% and HSBC 5th at 17%

These are all big numbers. For RBS a 17% mark down on 26B is 4.42B

Now we have a clue what RBS share price has been falling relentlessly and is headed right back to where it was trading at the bottom of the crisis in 2009.

Now if you listen to the press this is all the fault of Brexit.  Which strikes me as misdirection.  It’s trying to suggest this is a political problem created by the great unwashed and nothing to to do with greedy investors speculating and lenders lending into a bubble market.

The fact is that RBS’s share price has been sliding from early 2015 onwards. Which is interesting since until the end of 2015 commercial property prices were still going up and the experts just a few months ago in December 2015  quoted in the FT were assuring us that,

Real estate prices expected to remain high for years.

and that,

“Pricing has gotten very high but there’s a reason it has gotten high … and we think it can stay high,” said Bob Sulentic, the company’s [CBRE – the world’s ;largest property service company] chief executive. “There’s a wall of capital out there that wants to be invested in real estate.”

So let me recap – property prices were fine and going to stay fine said the experts in …property. But all the while certain people were selling their bank shares and trying to get out. And then what do you know. Suddenly those property prices were revalued down by 17% – overnight.

And if it was just RBS’s share price we might just think it was one bad apple. But Credit Suisse shares are trading at their lowest ever. While Deutsche bank, with more derivative exposure than any other bank, except perhaps JP Morgan is, .. well you decide.

I seriously doubt those banks are tumbling to such crisis levels just because of UK property and in some sort of clairvoyant anticipation of Bresixt. No this has been building and its real cause is systemic across the entire European banking sector.

So this is not something caused by Brexit. At most Brexit has made those holding over valued property assets suddenly crystallise a worry they have had for a while now, that someone might stop blowing their bubble for them.

Brexit has simply made it clear, again, that despite all the trillions in QE and the ECB buying corporate debt/bonds right down to the junk bond level, that the banks and the markets they lend to ARE NOT FIXED and never were.

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