Subprime 2.0: real estate fund redemption suspensions spread

Thanks to 8 years of low rates and lax lending, backed by government underwriting, realty prices in places like Canada, Australia, New Zealand, parts of the US, and Britain have boomed.   For those who know history and the classic earmarks of financial leverage taken to excess however, this movie is a familiar sequel.

It is always just a question of what final trigger will start the bust dominoes falling.  In Australia, NZ and Canada, recent rule changes to try and dampen run away foreign money laundering through property markets may well be the tipping point.  In Britain, it appears that the June 23 Brexit vote may have done the trick.  However long this takes to complete, the losers here will be property owners who bought high with too much debt, but also real estate ‘investors’ in a myriad of ‘hot’ property funds, ETFs, REITs, pensions, lenders, government underwriting agencies and ultimately of course, tax payers who will end up footing the bill for bailout funds.  Leverage on leverage on illiquid assets, with too little cash:  recipe for financial carnage.   See Contagion worries rise over property fund suspensions:

Eight companies, including Standard Life, Henderson and M&G, barred investors from selling out of their property funds amid fears about falling commercial real estate values following Britain’s vote to leave the EU.

Many of those investment companies, however, operate separate products that are also invested in the funds now closed to investor redemptions, and could block investors from pulling their money…

A prominent UK fund manager, speaking on condition of anonymity, said: “When you start getting daily trading funds-of-funds investing in daily trading funds that are invested in illiquid assets, that seems to be layering up potential liquidity risks. “[Investors need to] consider the impact on funds that are caught with material investments in the gated property funds.”

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