Situs Newswatch 8/15

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The Italian Bank Job

Italy’s banks are teetering. Estimates vary but by most calculations Italy’s lenders are under the weight of a €360 billion -roughly equal to $402 Billion- load of bad debts, that not only threatens to topple them, but also could take down the European financial system.

“Italy’s known about these problems for going on nine years and has done little to solve it” says Situs’ managing director Prasad Chaganti. “Their systems moves slowly for example in the U.S. state of Texas it takes 21-days to foreclose on a distressed asset, in Italy it takes seven-years!”

Italy is Europe’s fourth-largest economy, but one of its weakest. Public debt stands at 135% of GDP and the employment rate is lower than in any EU country except Greece.

“Considering the relative success of bad banks/asset management agencies in Ireland and Spain in the recovery of the respective economies, it is time that Italy comes up with a strategic plan in addressing the NPLs. A lot of international investors have an appetite for Italy, so long as the timelines for the recovery processes are addressed and it can’t be done without political will,” says Situs’ Chaganti.

Sometime between now and the October elections in Italy, Angela Merkel and the German people will have a critical decision to make. They will have to decide if Germany will offer its financial assistance in support of an Italian bank bailout.

When the UK voted for Brexit, it happened with the British Pound Sterling in place. All of British business and banking relationships were defined in its own currency. This feature of Brexit will make a transition of England out of the EU difficult but not impossible. Any Italian move out of the Euro or out of the EU could destroy the entire European financial system.

Be very worried.

Italian Banks Reel But Monti Has No Regrets for Avoiding Bailout

The future of the euro zone was hanging in the balance but there was still time for a soccer game.

On a June evening in 2012, German Chancellor Angela Merkel, European Central Bank President Mario Draghi, and then-Italian Premier Mario Monti used a break from their all-night talks to watch Italy take on Germany. Monti’s Azzurri won that encounter but lost the tournament championship three days later — to Spain.

The result of the Brussels crisis summit was much the same: Monti won a round from Merkel and avoided the bank bailout to which Spain had just succumbed. But today with the financial crisis in the rear-view mirror for most — and with Spain growing at twice the pace of the euro area — Monti’s successors are still struggling. Four years of economic stagnation later, Italy’s financial system remains too big to fail and too big to save.

Yet Monti, 73, has no regrets. Currently the president of Bocconi University in Milan, Monti says the rescue, and its draconian conditions, wouldn’t have worked in Italy. So he focused at home on shoring up the nation’s own finances and in Brussels on getting a rescue fund that could aid troubled banks directly instead of funneling more loans through debt-burdened governments.

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NYC: Large Office Landlord to Build First Residential Building

RXR Realty, a firm known for its expansive collection of large office properties in the city, has reached a deal to develop its first residential building.

The firm purchased a leasehold of a parking lot at 810 Fulton St. in Brooklyn for $28.7 million and plans to erect a 10-story rental apartment building with roughly 33,000 square feet of ground-floor retail space.

The seller and previous owner of the leasehold on 810 Fulton St., GFI Development, had already obtained city approvals for development rights from a neighboring building, 470 Vanderbilt Ave., to be transferred to the site in order to build the residential project. In exchange for the additional air rights, the developer agreed to reserve 20% of the building’s 363 units for affordable housing.

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NYC’s Retail Real Estate Market Weakens, but…

New York City’s revered retail economy has underwhelmed so far in 2016, giving off a gloomy long-term outlook. Landlords at 10 of the 17 retail hot spots are requesting smaller rents than they did a year ago.

According to a recent Real Estate Board of New York survey of landlords, asking retail rents this spring have dropped to $126 per square foot, from $153 per square foot from the same period last year.

“In many ways, Manhattan’s prime shopping corridors have been a victim of their own success,” said Joseph Sollazzo, real estate economist at CoStar. “Rents have reached astronomical heights, causing many retailers to balk at paying. Despite the marketing benefits associated with high-profile locations in New York City, we’re currently butting up against the limit of what retailers are willing to spend.”

Companies have been suffering: Macy’s share price has tumbled and longtime giant retail chains like Sports Authority and Aérospostale have fallen into bankruptcy and shuttered stores in the city. With more shopping being done online, the fear is that the downward spiral for brick-and-mortar locations won’t stop here.

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China Bad-Loan Gauge Holds Steady After Almost 3 Years of Gains

China’s official bad-loan ratio held at 1.75 percent in the second quarter after almost three years of increases, suggesting some progress as President Xi Jinping’s officials try to defuse risks from the nation’s explosion in credit.

The China Banking Regulatory Commission didn’t give reasons in Wednesday’s data release. Lenders have stepped up efforts to clean up nonperforming debt and profits have improved in some struggling industries.

“Though it’s still too early to say the tide has turned, we see clear signs of improvement in new bad-loan formation as companies in industries with overcapacity are doing a bit better,” said Richard Cao, a Shenzhen-based analyst at Guotai Junan Securities Co.

The 1.75 number contrasted with BMI Research, part of Fitch Group, saying on Wednesday that “highly understated” official numbers mask the potential for a ratio at 20 percent, $1.9 trillion of losses, and the need for central bank money-printing to recapitalize banks in coming years.

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Median Home Price Tops $1-Million Mark in a U.S. City For First Time Ever

Rising home prices and growing affordability concerns showed no signs of abating in the second quarter, as San Jose, Calif. became the first city where the price of a typical home eclipses $1 million.

Home prices rose in 83% of metropolitan areas across the U.S. in the second quarter compared with a year earlier, according to data released Wednesday by the National Association of Realtors. That is a slight decline from the first quarter, when price increases were reported in 87% of metro areas.

Still, there were some signs the market is starting to cool, bringing welcome relief for home buyers. Twenty-five out of the 178 metropolitan areas included in the report experienced double-digit price gains, down significantly from the same period last year, when 34 metro areas saw double-digit gains.

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Lopsided U.S. Housing Rebound Leaves Millions of People Out in the Cold

The housing recovery that began in 2012 has lifted the overall market but left behind a broad swath of the middle class, threatening to create a generation of permanent renters and sowing economic anxiety and frustration for millions of Americans.

Home prices rose in 83% of the nation’s 178 major real-estate markets in the second quarter, according to figures released Wednesday by the National Association of Realtors. Overall prices are now just 2% below the peak reached in July 2006, according to S&P CoreLogic Case-Shiller Indices.

But most of the price gains, economists said, stem from a lack of fresh supply rather than a surge of buyers. The pace of new home construction remains at levels typically associated with recessions, while the homeownership rate in the second quarter was at its lowest point since the Census Bureau began tracking quarterly data in 1965 and the share of first-time home purchases remains mired near three-decade lows.

The lopsided recovery has shut out millions of aspiring homeowners who have been forced to rent because of damaged credit, swelling student loans, tough credit standards and a dearth of affordable homes, economists said.

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Foreign Buyer Tax Creates Uncertainty in Vancouver CRE

The roiling debate over the province’s 15-per-cent tax on foreign buyers of residential real estate in Metro Vancouver has spread to the commercial market, with stakeholders pondering the fallout of the surprise levy and the chances of a similar tax being placed on commercial sales.

When the provincial government slapped foreigners with the 15-per-cent property transfer tax on Aug. 2, it carved a series of fault-lines throughout the community. Many welcomed the tax as a way to ease overheated housing costs in the region, while others blasted the policy as rushed and thoughtless — count among those the many homeowners who had inked deals with foreign buyers before any word of the tax broke, only to have the tax rules change before their deals could complete.

Commercial real estate lawyer Peter Anderson said he doesn’t expect that a similar tax will be placed on commercial sales in the near future.

“A lot of the commercial activity you see in the Lower Mainland lately has been offshore buyers,” said Anderson, who practises at Boughton Law in Vancouver.

He pointed to the high-profile acquisitions of the Bentall Centre and Royal Centre in downtown Vancouver by foreign buyers earlier this year. But he said foreign buyers have always been active in Metro Vancouver and the animosity in the debate over foreign real estate investment has appeared to concentrate mostly in the residential market so far.

Before Aug. 2, the property transfer tax for residential and commercial sales in B.C. had been the same: one per cent on first $200,000 of a sale; two per cent on the balance up to $2 million; and three per cent on the value greater than $2 million, Anderson said.

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When Your Backyard Costs $37.5 Million

When the world’s superrich shop for a lavish garden to frame their sprawling estates, they call Belgian master-landscaper François Goffinet.

Goffinet’s secret weapon: a deep knowledge of the land and a timeless classical style. With his pavilions, ironwork, gate lodges, and follies (who doesn’t love a good hedge maze?), he’s reviving the grand tradition of the 18th century one garden at the time.

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