Hey GrahamMac,Hasn't anyone told you that we're not in a market...

Hey GrahamMac,

Hasn't anyone told you that we're not in a market of easy liquidity anymore?

Maybe there might have been a couple of little things to tip you off to that, like...oh, I don't know - a world-wide credit crunch; bank-runs in the UK, MBS and commercial paper markets shut down, multi-billion dollar write-offs by US and European investment banks, US & UK real estate markets crashing, RAMS going broke in Australia because no-one wants to buy its debt, etc., etc., etc.

ALZ can't keep on increasing its borrowings to expand project development like it has been for the past few years, Graham.

"Mark Gleeson, group manager, structured finance, at residential property developer Australand, which has done a pre-sales securitisation in each of the last three years, says the company's customers make a 10 per cent deposit on an apartment with the obligation to pay the balance at settlement, when the property is completed. "We bundle up those obligations and sell them off, with the delivery risk on the project being underwritten generally by a bank with a letter of credit, so that the investors are taking settlement risk on the purchasers and the bank assuming the delivery risk through the letter of credit."

"The paper is taken by a range of asset-backed investors, who're looking for investments of less than two years' term, where the rating reflects the bank and its letter of credit and the level of over-collateralisation. Investors get a yield pick-up - a premium - for the paper because it's a different investment opportunity. It's an asset in the ABS class that's quite new."

Being derived from a residential sales contract, some investors may have concerns about pre-sales contracts as an untested asset class - they have only been around for two to three years - but Gleeson says this concern has not been borne out. "We've had two of these - one only just settled in January-February, and all the bonds were successfully repaid. Really, what could put a pre-sales contract securitisation under pressure is declining property values, rising interest rates, falling liquidity in the housing market, but those are things that we're experiencing now, and we're still settling the contracts. The rating agencies stress-test the portfolio - they assume a certain level of default, a timeframe for recovery, interest being capitalised all through the period, then come up with a discount factor, if you like, against the contract, at which they'll advance against at certain rating levels. It's no different to tranching in your CMBS."

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Graham, you're old enough to know what happens to property developers in times of rising interests rates and declining liquidity. The only question is, are you smart enough to learn from the past? So far, the answer seems to be, "No".

One thing's for sure: they won't have been placing too many of those CMBS's in the past quarter. That's why I say that their quarterly report will be veeerrry interesting.

Tick...tick...tick...