US property investors cheer and boo Treasury program

NEW YORK Feb 10 (Reuters) - Commercial real estate investors gave the U.S. Treasury Department's new plan to fix financial markets both jeers and cheers, as some said it did not begin to solve the problem of the frozen lending market and others said it could only help.

"Today was a great example of over-promising and under-delivering," Thomas Barrack Jr, chairman and CEO of real estate private equity firm Colony Capital, which has invested about $39 billion since its establishment in 1991. "What the administration had gotten the market ready for is a solution and a plan. What we got was a non-plan and no solutions."

Real estate investment trust (REIT) investors agreed, sending the benchmark MSCI U.S. REIT Index .RMZ down 9.45 percent on Tuesday.

U.S. Treasury Secretary Timothy Geithner on Tuesday unveiled the U.S. government's Financial Stability Plan. The new plan expands the already announced Term Asset-Backed Securities Loan Facility (TALF) to include commercial mortgage-backed securities (CMBS).

Under TALF, the Federal Reserve Bank of New York may lend up to $200 billion to holders of AAA-rated securities backed by new and recently originated loans.

CMBS are backed by mortgages on offices, hotels, apartments and other income-producing real estate. Without an active CMBS market, the commercial real estate market cannot return, many experts say.

Sales of the U.S. commercial real estate market have come to a near dead halt as sources for credit, particularly the CMBS market, have dried up. In 2007, CMBS issuance topped $230 billion. That dropped to $12.1 billion in 2008, with no new issuances since June 2008.

Without new sources of funding, real estate owners, such as General Growth Properties Inc (GGP.N), have found themselves unable to refinance loans coming due.

CMBS prices have tumbled on fears that owners won't be able to pay back the principle of the mortgage, many of which are interest-only.

A year ago, the top-rated CMBS traded at 2.25 percent over the 10-year Treasury rate, according to CMBS information provider Trepp. That has climbed to 10 percent over Treasury and reflecting the fears of repayment and unknown value. Bond prices and spreads move inversely.

The Financial Stability Plan needed to create a "bad bank" that would buy up bad assets from lenders at a calculated price, Barrack said.

Although delinquent loans crept up in 2008, they could mushroom as many of the loans from the easy-lending days of 2005, 2006 and part of 2007 come due.

"The real estate market hasn't even started to get hit the way it's going to get hit,' Barrack said. "Unless you have something happen, you have $350 billion of refinancing without one dollar to refinance with."

The price of new loans under the plan may indirectly help set the price of older, riskier loans, said real estate investor Philip Blumberg, chairman and CEO of Blumberg Capital Partners.

Like some other investors, Blumberg said the plan lacks details.

"It is confusing because it's not clear," he said. "There's certainly not enough beef on the bones of this proposal."

Even if the plan spurs lending, the new loans likely will cover less of the property values, which have declined an average of 20 percent to 30 percent. The gap means equity holders will likely bear the brunt of the loss, which explains the sell-off of REIT shares, Blumberg said.

"It's not going to solve the pain," he said.

But on the debt side, the CMBS market rallied with spread narrowing slightly less than 100 basis points since Monday when Bill Gross said the plan could include CMBS, according to Trepp.

"I thought it was a very solid, very clear and very comprehensive overall financial plan," Mort Zuckerman, chairman of office owner Boston Properties, said. "It will prevent foreclosure prices from determining the value of assets."

One investment banker said that even if Treasury's plan was successful, U.S. commercial real estate still faces higher vacancy rates and lower rents, resulting from the U.S. recession.

"There's cash-flow risk," said the banker, who did not want to be identified. "I think there's going to be a lot of tenant defaults." (Reporting by Ilaina Jonas; Editing by Gary Hill)