Berkshire Hathaway VP warns of credit crunch in real estate market

• Stricter criteria for granting (commercial) real estate loans
• Bank portfolios burdened with “bad loans”.
• Gone are the golden days of investing

The Berkshire Hathaway VP warned that the credit crunch has gripped the commercial real estate sector and investors are facing a combination of falling house prices and heightened competitive pressures.

Credit crunch hits real estate market

Lending for real estate is subject to ever more stringent criteria. This suggests that banks are increasingly withdrawing from the real estate business, as many have suffered painful losses in their loan portfolios as a result of the fall in real estate prices. While the declines aren’t comparable to those of 2008, the Warren Buffett partner told the Financial Times, “difficulties happen in banking just like anywhere else.” In good times you adopt bad habits, which then have a negative effect in bad times, he explained, referring to the bankruptcies of Silicon Valley Bank and First Republic Bank.

SVB, First Republic Bank and Co.: Banks “full of bad loans”

In the past, Berkshire Hathaway had appeared as a supporter of struggling banks – for example in the 2008 financial crisis with billions in investments in Goldman Sachs and Bank of America. In the recent bank collapse in the US, however, Buffett and Munger exercised restraint. The reason for this is the huge real estate portfolios of the financial institutions.

Numerous banks are burdened with “bad” commercial real estate loans. “A lot of real estate isn’t that good anymore, and we have a lot of troubled office buildings, a lot of troubled shopping malls. There’s a lot of suffering out there,” commented Munger on the possible risks of bank portfolios in an interview.

Berkshire Hathaway: Passive real estate portfolio only

With Berkshire Hathaway, Buffett and Munger only invest in real estate investment trusts, so-called REITs, which allow the development of a passive real estate portfolio. Because, although you wouldn’t actually expect that from the investment holding company’s buy-and-hold approach, owning real estate contradicts Berkshire Hathaway’s investment strategy. In the past, Munger described real estate ownership as a “bad investment” because management and maintenance would inevitably result in active business activity, which contradicted his understanding as an investor. In addition, real estate would be priced more accurately, Buffett said some time ago at a shareholder meeting. This makes it almost impossible to find significantly undervalued properties.

Few opportunities for worthwhile investments

Speaking to the Financial Times, Munger also warned that investors should brace themselves for falling returns. The golden age of investing is over: Higher interest rates and the growing number of “bargain hunters” are reducing returns.

Munger himself, whose fortune is estimated by Forbes at around 2.4 billion US dollars, has only made four worthwhile investments in his life: Berkshire Hathaway, the US retail giant Costco, funds from Li Lu’s Himalaya Capital and the real estate manager Afton Properties. “It’s in the nature of things that a very smart man who works hard might get maybe three, four, five really good long-term opportunities to buy big companies at a bargain price,” the Berkshire vice president said .

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