The whole Centro mess might be unwittingly triggered by a too-smart new loan manager at a bank who wants to outperform his predecessor.
In common sense, Centro's problems talked in the media today should be actually no problems at all.
Centro's high leverage -- Centro's 70% of loan to asset value should not be considered too high. The new home-loan borrower can borrow loan at 80% loan to home property value. No one can assume that it will be safer to lend money to the home-loan borrower than a shopping centre owner.
Centro's business model is a bit complex, but wonderful in business senses. For $1 of Centro's equity, it adds $3 other investors' equities and $6 of debt then buys and manages $10 property assets. Let's assume the interest rate is 8%, the rent return on properties is 6.25% and the management fee is 0.7% of managed $10 property assets. Then, Centro can earn $10x0.7% + (6.25%x$10-8%x6)/4 = $0.10625. The return on Centro's equity ($1)is 10.625%. This is in the case of no gains on property valuation. When the value of managed property grows, Centro's management fee will grow, so does the rental return on Centro's equity portion. What kind of business in this world can earn a certain return of over 10% on its equity in such a easy way like Centro?!
Banks have the duty to preserve the property market, not damage it. If the banks kills Centro and make Centro's properties 30% under the valuation, then the banks will eventually kill themselves as the banks will not only suffer huge losses from the Centro's collapse, but also from the collapse of the whole commercial property market.
Kevin Zhang 15 Jan 2008 4:35 PM
CNP Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
