Duh! Overfinancing Is Risky!

Implications: This article talks about the real estate-driven credit crunch as being bad for all REITs, but I disagree. The article ignores the fact that over-financing in the shopping center world is hardly a new phenomenon.  This kind of thing has been going on ever since the first shopping center lenders started allowing developers to borrow 110% of the cost of developing their projects. Centro, one of the featured companies in this article, is a classic case of very aggressive expansion. However not only are they guilty of very rapid expansion and the attendant rapid buildup of debt, but what is less evident is that in their haste to expand, they overpaid for some very mediocre properties.

Analysis: It is my firm opinion that the Centro debacle is in no way related to the possible credit crunch that the other, more conservative REITs find themselves in. Centro bought many portfolios of mediocre properties at highly inflated prices and then financed them to the max with very cheap money. Now everyone seems surprised that they find themselves in a serious credit crunch and some analyst blame it on the fact that they are a REIT and start bad-mouthing all REITs!

To me this is a classic case of   analysts simply not paying attention. In their eagerness to lend money to anyone that could spell "retail real estate" the lenders have done a disservice to the entire marketplace.  It is the old story about "those who forget history are condemned to repeat it".