> A lot of these projects are financed with rent projections as part of their valuation to lock in loans and attract investors
I would like to see proof of this. All the commercial backed mortgages I have been privy to come with debt service coverage ratios, which can trigger default if total cash flow is not as expected.
Some rent is always more than no rent. Lenders aren’t fooled by property owners earning less money, but advertising higher than market rate rents to prospective tenants.
The only question is if the lender wants to trigger the default and take over dealing with the property, and many times they don’t, and prefer to renegotiate the terms of the loan.
Extend and pretend is the name of the game. If the lender triggers a default they will be stuck with the property and have to take the large balance sheet loss. Its generally better for them to pretend everything is fine until the property owner cant make the payment and even then its usually better to renegotiate than it is to take the hit. There isnt a clearing mechanism that would force the loss to occur and the property to resell at new market value.
Thats really the danger of low rates, it slows down market clearing forces and allows zombie companies to persist for a very long time.
This depends on how hard it is to increase rent later. A lot of these projects are funded on a mix of low interest loans and investor money. Sometimes mixed with own funds. This poses two issues right now, one is that low interest rates is hard to come by, the other is that investors can now get close to the 5-7% returns by going with much safer options.
Low rent being better than no rent is a consumer perspective to the financing of these projects. What they sell isn’t actual income, it’s projected income and returns and if you lower rent those change. When they change investors are less likely to repeat business, which means your primary business (which isn’t to supply housing but to sell investments) goes down. So it’s much better to simply wait things out, at least for a 2-5 year period. If you have liquidity you can even bet on outlasting competition and buying their projects cheap.
Banks on the other hand aren’t fooled, but they’ve also loaned you so much money when the interest rates were basically 0. Interest rates that you didn’t lock down because it might go lower. Now that your loans are suddenly millions, if not billions, more expensive than projected you probably can’t pay and if you can you certainly don’t want to. So you work out deals with the banks out of mutual interest in keeping the “pretence” going because what you’re both making money off is the flow of money.
You’re going to see something similar happen in the green energy industry unless governments up their tariffs.
I would like to see proof of this. All the commercial backed mortgages I have been privy to come with debt service coverage ratios, which can trigger default if total cash flow is not as expected.
Some rent is always more than no rent. Lenders aren’t fooled by property owners earning less money, but advertising higher than market rate rents to prospective tenants.
https://www.investopedia.com/terms/d/dscr.asp
The only question is if the lender wants to trigger the default and take over dealing with the property, and many times they don’t, and prefer to renegotiate the terms of the loan.