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Thursday, 11 August 2011

An SMS from Ernst (12): Short Messages Service

New, profitable initiatives at locked-up CRE-market

The Dutch CRE-market is badly locked-up: about 15% (and rising) of Commercial Real Estate and office buildings is vacant. About 60% of this vacancy is structural. I’ve written numerous articles on this phenomena. An (incomplete) list:

-    Dark clouds ahead for Commercial and Residential Real Estate (CRE + RRE) in The Netherlands.

-    Getting rich with Commercial Real Estate (CRE) Pt IV? Better look for some friends in high places!

-    Getting rich with Commercial Real Estate (CRE) Pt III? No, we can’t!!

-    Getting rich with Commercial Real Estate (CRE) Pt II? Yes, we can!! Can we??

-    Getting rich with Commercial Real Estate (CRE)? Get real!


Although the situation in the CRE-market itself stays grim, this very situation leads to new and prosperous initiatives, mindful of the creed: one man's meat is another man's poison.

Due to the massive vacancy in CRE, there is currently much need for two services:

-    Professional anti-house break guards that protect office buildings from house squatters: people that are looking for a free new home and take residence in vacant office buildings.

-    Refurbishing service bureaus that execute maintenance on long-term vacant CRE, in order to return it to pristine condition for the moment that a company does want to rent the building.

It is not remarkable that bureaus like these can exist, as there is normally always a small market for this kind of special services.


What is a tell-tale signal, however, is that these bureaus (especially the anti-house break guards) can grow and prosper, due to the current trying times. This sends a signal that the CRE-market is not even halfway a recovery, which shouldn’t come as a surprise to my regular readers.

New European Rating agency: distrust turned solid?

There have been many complaints on the big three ratings agencies S&P, Moody’s and Fitch:

·    They were much too late with downgrading Triple-A ratings on Alt-A and Subprime Mortgage CDO’s (Collaterized Debt Obligations), when the subprime crisis broke out.
·    Their Triple-A ratings of Alt-A and Subprime Mortgage CDO’s (Collaterized Debt Obligations) were said to be based on the principle: ‘who pays, decides…’. Those products should have never had those ratings, to begin with.
·    Now, the agencies are accused of ‘overreacting’ in the Sovereign bond crisis, towards France, Greece, Portugal, Spain and Italy.
·    The US accuses S&P of ‘overreacting’ in the aftermath of the debt ceiling crisis, by downgrading the USA to AA+
·    China accuses Moody’s, Fitch and to a lesser degree S&P of ‘underreacting’ in the aftermath of the debt ceiling crisis.

Summarizing: whatever the rating agencies do now, it will always be getting on someone’s nerves. That in itself is not a big problem.

What is, however, a big problem is that the credibility of the large three rating agencies is still close to zero in the eyes of many investors.

Governments, large banks and other interested parties are abusing this fact, by further discrediting the rating agencies when the decisions are not in their favor. The most killing accusation that can be made, is that a rating agency is ‘politicized’.

In this light, you should look at the latest development in rating agencies: the European rating agency. The Economics NewsPaper writes on this initiative. Here are the pertinent snips:
Europe’s first rating agency to be launched in 2012 – competition for Moody’s, S & P and Fitch
Hamburg (RPO). early as next year, the first European ratings agency [is planned] to start working. According to media reports, the plans, a competitor to the U.S. rating agencies Moody’s, Standard & Poor’s (S & P) and Fitch build, [are] more specific than previously known.

Markus Krall, Partner of Roland Berger Consulting advertises, according to a report by the business magazine “Capital”, for a year to governments and companies for a European model. This should be privately funded and much cheaper than their U.S. competitors are working. While the rating of a DAX company today can easily cost one million euros, the European agency should require less than half of them.
According to the report to the new model, the investors bear the cost of the rating. For existing agencies must do the issuers. According to “Capital” is intended to publish as an independent agency in the Foundation’s planned second quarter of 2012, the first country assessments. In the second half should then be awarded marks for banks, in 2013, eventually for other companies and financial products. In the meantime, about 1,000 employees to ensure all major financial centers for a global presence.
Building a European Rating Agency, which last even Chancellor Angela Merkel (CDU) is endorsed, the report reveals that cost around 300 million €. The seed money should come from European companies in the financial industry. Krall said, “Capital”, “until the end of 2011 we will have formed a consortium of up to 25 players to invest ten million Euro.” Among the supporters of the model count German Bank CEO Josef Ackermann.

Although this might seem a good initiative at first glance, it bears the same credibility issues that are surrounding the big three and the Chinese rating agency Chengxin:
·    Is this agency credible?
·    Does it have the fire power to thoroughly investigate the fundamentals that are the basis of a solid rating judgment?
·    Is the agency not politicized?
·    Does it not favor governments and companies in the domestic market (i.e. Europe)?

And my second objection is more fundamental. It is concerning the fact that the investors at this bureau would be paying for the rating, instead of (the issuer of) the entity that is rated.

This sounds like the ideal solution to get a fair and objective rating. My objection is, however, that the investors might not be willing to pay for these ratings and therefore prefer the ratings of one of the big three instead. That would mean that the earnings model of the European rating agency is built on quicksand.

For instance, even if this EU rating bureau could do the rating of a DAX company for only €0.5 mln: who will pay for it? Large pension funds? Why should they?! As long as any rating bureau calls this company an investment-grade company, everything is cool for the pension funds. The same is true for the large banks and insurance companies. They use the ratings of the big three, just as easily.

The hedge funds might be a better candidate as these need to have good performance. But half a million Euro is a lot of money to earn back.

Then remain the small or private investors. How will these pay the €0.5 mln? To pay this, they would need 1000 investors, paying €500 each. I don’t see this happen.

Therefore I think this new EU rating agency might be a dead horse. Not worth your while to pull at.

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