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Salomon analysts say O&Y reminder of continuing woes.

The bear market in real estate is continuing and will not prove to be yesterday's problem, according to John Leonard, head of Salomon Brothers' research banking group and David Shulman, Salomon Brothers' chief equity strategist. The two believe this fact is underscored by Olympia & York's current difficulties.

"In our opinion, the significance of the O&Y situation is not its individual aspects -- however sizable the exposures -- as much as the reminder that the structural issues facing the real estate industry are not over and are not confined to the United States"

Writing in a report, "Real Estate -- The Story Isn't Over," the authors state that the O&Y negotiations do introduce two new elements into real estate workouts. First, O&Y represents the first truly multinational real estate workout, and the potential for cross-cultural difficulties, according to the report, seems to be high. Second, in addition to its real estate loans, O&Y is extensively involved with its banks in interest rate and currency swaps, many of which include a net uncovered exposure to the bank.

"It is unclear," the analysts state, "whether swap obligations also are covered by underlying loan documentation, including mortgage security, and whether participant banks are responsible for a pro rata share of any swap losses. We believe that O&Y may already have cashed in some of the swaps -- where it had a profit -- to ease recent cash flow stringencies."

The Salomon Brothers analysts say that the problem is positive for the overall stock market, not the least because real estate will not be a strong competitor for either equity capital or increased absorption of debt capital.

The report states that two principal problems continue to weigh on real estate --even if bank stocks ignored them in the first quarter of 1992: first, the probability that real estate entered a down phase in 1989 after 50-year cycle, and second, the reversal of Say's Law, which states that supply creates its own demand. "We suspect that three reasons undelie the market's recent inattention: a reaction to the amount of attention given to real estate in 1990-91; the shift to greater asset forbearance among regulators; and the beneficial effect of low, short-term interest rates on properties financed with floating-rate debt."
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Title Annotation:Olympia & York financial difficulties
Publication:Real Estate Weekly
Date:May 6, 1992
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