Read More
Richard Scrope
Fund Manager
In the aftermath of the collapse of SVB, Credit Suisse and Signature Bank, investors and regulators have scoured the banking sectors deposits and lending exposures to evaluate whether any other bank may be at risk of a similar fate. One of the findings that has come out is the exposure that small and medium sized banks have to the real estate market, and in particular the commercial side. The chart below from BCA Research shows just how exposed they are; Mid-sized banks ($10bn-$250bn) account for $1.28 trillion of the $3 trillion lending to the commercial real estate sector and small banks (sub $10 bn) a further $1 trillion.
As rates increase, lending standards are tightening and thus investors are concerned about the outlook for the companies that are exposed to the sector. The chart below shows the net percentage of US banks that are tightening standards for commercial loans to large and middle-market firms, and also how banks were already aware of the risks in the sector after one of the easiest periods of obtaining a loan in the past thirty years; we expect that the next data point will be close to peak levels given that the last reading was reported in February - a loan financed at 3.5% twelve months ago would be sitting at 11% if financed today.
The latest JP Morgan survey saw 38% of respondents reply that CRE will be the likely cause of the next crisis and the Architecture Billings Index has notched up its 5th consecutive month of declines, which has a perfect correlation with a drop in the CRE market. These factors and the correlation with a declining residential market (albeit with an 18–20-month lag) has led to investors selling companies with high amounts of exposure to the sector. This selling was exasperated by Acuity, which has almost 90% of its sales related to the sector, warning this week, accompanied with a very bearish outlook statement.
However, there are a few factors that may lead to a stay of execution and, like Kevin Costner, show the bears that if they build it, the crowds will come. Firstly, we are now seeing signs that the residential market might have bottomed as home sales have started to inflect, albeit if median prices have dropped for the first time in more than a decade.
More importantly is the wave of reshoring that has accelerated in the wake of the pandemic. These projects are how entering the implementation stage and should soften any slowdown in the CRE market. Furthermore, President Biden’s infrastructure bill is ambitious and gargantuan in nature and is likely to further lessen the blow on the industrial related names when local authorities start to allocate the funds to projects. The $52bn Chips act has led to a wave of large-scale announcements of foundry investments in the US from the likes of Intel, TSMC and Micron. While it can be foolhardy to declare that ‘this time is different,’ perhaps it is when the sentiment is at its lowest and the skies are at their darkest when opportunities can be found.
WARNING: All information about the VT Tyndall Global Select Fund(‘The Fund’) is available in The Fund’s prospectus and Key Investor Information Document which are available free of charge (in English) from Valu-Trac Investment Management Limited (www.valu-trac.com). Any investment in the fund should be made on the basis of the terms governing the fund and not