Moody’s/REAL CPPI Trifurcation continues

March 7th, 2011  ::  Posted by CRE Console

In the latest Professor’s Corner Newsletter, Sam Chandan, Global Chief Economist for Real Capital Analytics, commented on the CPPI’s continued trifurcation between the composite index, distressed deals and the 6-city trophy index.

Apart from the dispersion of outcomes across property types, the decline in December’s aggregate index belies the continuing divergence of trends across performing and distressed assets, and across major markets and the balance of metropolitan areas. The upswing in major markets, in contrast with the broader index, was particularly evident in December’s findings.

Trophy and Distress Indices vs CPPI Since Market Peak

For the six‐city trophy group – Boston, Chicago, Los Angeles, New York City, San Francisco, and Washington, DC – the index jumped by 7.0%. The December increase coincided with a spike in the six‐city repeat‐sales transaction volume, to almost $3.0 billion, fueled in large part by a rise in sales out of distress.

While distressed deals weighed down the CPPI enough turn the index negative for the firs time in 4 months. Even so, Dr. Chandan offered some words of encouragement.

As a result of this trend, sales out of distress will continue to play a role in driving the index and the interpretation of its movements. In this context, a falling value for the index is not necessarily indicative of market weakness; quite the opposite, it may suggest that sales out of distress are increasing because lenders judge that the market’s capacity to bear these sales has improved.

The CPPI is up 5.5 percent from its August, 2010 low of 105, but down 2.2 percent for the entire year of 2010 and 42.1 percent from its highs of October 2007.

4 Responses to “Moody’s/REAL CPPI Trifurcation continues”

  1. Joshua says:

    i think the last quote is becoming more accurate as time continues to move. distressed deals can finally be sold cause the lenders can handle the impairment. but the 6 city trophy still makes no sense to me. big owners/funds are really chasing yield in a way that is basically setting them up to fail. do you now remember the last couple years? wtf sense does a 6% CAP make in a soon to be rising interest rate environment?

  2. CRE Console says:

    It is crazy. I think it is a function of, “Heck, we raised all this equity, and now we have to pay dividends on it, so we’ve got to place it.” As I said in November, in the post “A core opportunity for some“:

    Investments in large, core assets allow these investment managers to place money as quickly as possible, but not necessarily in deals with the best opportunity for return.

    This very topic came up at dinner tonight with a London-based private equity group who said the same thing happened in the early 90′s – gateway trophy deals were bid up so quickly, that there was no money to be made on them. The real money was all made on buying the hairy stuff, and mainly pools of debt from the RTC.

    Now, while there is no RTC this time, and not the flood of distressed assets everyone expected (hoped for?), the best opportunities they are seeing are from European banks who had no business lending on US collateral in the first place (aka DekaBank, Anglo-Irish, et al).

  3. CRE Console says:

    Green Street Advisors, Adam Markman:

    [..] expects transaction activity to continue in the REIT space as companies continue to trade at significant premiums to their unlevered asset values as well as to net asset value.

    “As long as this is the case, [REITs] benefit from a huge cost of capital advantage relative to other sources of real estate capital.”

    We couldn’t have explained it any better – it is easy to overpay when your money is cheaper than the other bidders….

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