The EconomistJune 27th 2020 Leaders 912 aristocrats has become increasingly infiltrated by strait-laced in-
stitutions and algorithm-crunching fund managers. The typical
pension fund’s allocation to commercial property has risen from
5% in 2000 to over 10% now; institutional investors have about
$11trn sunk into the asset class. Leases routinely stretch a decade
or more into the future. The combination of reliable rental in-
come and capital appreciation has meant that commercial prop-
erty has successfully given investors annual returns of over 7%.
All they needed was patience. That will no longer be enough.
The immediate problem is that tenants are behind on the
rent. Every recession involves sporadic delinquencies, but the
lockdowns have led to anarchy in some bits of the property busi-
ness. Perhaps a quarter of free-standing shops,
half of mall tenants and 60% of restaurants in
America and other Western markets are not pay-
ing their dues. This can be a spontaneous rebel-
lion or landlords may have offered holidays.
Some cities and governments have introduced
moratoriums. Landlords have taken a hit to
their income. So far they have been unwilling or
unable to repossess buildings that may have no
other prospective tenant. A growing number have defaulted on
their debts. Commercial-mortgage-backed securities, which
bundle up property loans, have seen delinquency rates exceed
the levels in the financial crisis of 2007-09.
Temporary delinquencies are only part of the problem. In the
longer run the uses of property may change. E-commerce activi-
ty has risen to the level pundits had thought it would reach three
to five years from now, speeding up the decline of bricks-and-
mortar shops and boosting demand for warehouses. Firms that
have found remote-working tolerable may shrink the office
space they hire. Video calls in lieu of business trips could reduce
the number of hotel nights billed. Even as economies open up
again, there are signs that behaviour may have changed perma-
nently. The latest mobility-tracking data suggest that activity in
offices in America is 36% below normal levels. It is 15% below the
usual level for retail and recreation spaces such as restaurants,
shops and cinemas.
Savers and the fund trustees who represent them should fol-
low two tracks. The first is to get a realistic picture of the losses
they face. If the property industry used to be amateurish, it is
now all too often professionally opaque, with layers of holding
companies and debt standing between the bricks and girders
and their ultimate beneficiaries. The managers of buildings and
investment vehicles may have an incentive to mask difficulties.
Some, for example, are bailing out struggling re-
tail tenants, perhaps in order to avoid admitting
to rent defaults. Others are sticking to unrealis-
tic valuations, which the industry’s arcane ac-
counting practices make easier to sustain.
The bigger task is for investors to embrace
the restructuring that must take place. Hotels
may need to become apartment blocks; malls
may need to be reincarnated as e-commerce-
fulfilment centres; and office blocks may need to be refurbished
so that desks are farther apart. All of this involves not sitting on
properties and milking them for rent, but reinvesting in them
and, often, selling them to different owners. That holds open the
potential for greater efficiency, but also for fee-skimming and
unnecessary losses if unaltered buildings are sold off cheaply.
Property has long been a slow-moving asset class because
leases last for years and tenants normally change their behaviour
only gradually. Landlords and their financial backers have thus
got used to a business that moves at a glacial pace. For two de-
cades a reliably easy way to make money has been to buy a com-
mercial building and go to sleep. Time to wake up. 7US mortgage-delinquency rate
Commercial-mortgage-backed securities
30 days or more past due, %
10
5
0
2007 10 15 20G
ermans consumedby tech envy of America allowed them-
selves a flush of pride when Wirecard won a place in the dax
index in 2018, and its stockmarket value surged above €24bn
($28bn). Here, it seemed, was a European fintech champion: a
digital-payments firm headed for global glory. Today, faces are
red again—with embarrassment. Wirecard has admitted it has a
€1.9bn hole in its accounts. Its founder and boss, Markus Braun,
once lauded as a visionary, quit on June 19th and was arrested
and bailed this week on suspicion of false accounting and mar-
ket manipulation. The firm has begun insolvency proceedings.
Wirecard’s rise and fall is a case study in the carnage possible
when a firm’s accounting goes awry but national regulators and
big investors are so seduced by the company’s narrative that they
cannot, or will not, see it. It is also a reminder of how markets
stand to benefit from short-sellers—who try to make money bet-
ting against listed firms, by selling borrowed shares and buying
them back later at a lower price. Had the warnings from Cassan-
dras who detected a bad smell around Wirecard years ago been
heeded, billions of dollars of losses, many of them borne by pen-
sion-fund investors, could have been avoided.Questions about the firm’s accounting began to swirl in 2015
(see Finance section). They have intensified in the past 18
months with a series of articles in the Financial Times, informed
by short-sellers and whistle-blowers. Instead of taking these se-
riously, Germany’s markets regulator, BaFin, seemed keener to
shore up confidence in Wirecard and attack the attackers. It tem-
porarily banned shorting of the firm’s stock, a first, and opened a
criminal case against journalists for suspected manipulation.
Big banks and investors, including Deutsche Bank and its
dwsfund-management arm, backed Wirecard and kept the faith,
in some cases doubling down, even as more and more red flags
popped up. Many did scant due diligence, instead relying on puff
pieces churned out by sell-side analysts right to the end: half a
dozen still had buy recommendations on the stock when Mr
Braun resigned. Wirecard’s auditor, ey, faces scrutiny, too. Ger-
many’s media, for the most part, swallowed Wirecard’s line that
it was the victim of a nefarious plot by Anglo-Saxon marauders.
When so many clever people can get it wrong, anything that
injects scepticism is welcome. Such counterweights to market
consensus are especially helpful when politicians and centralIn praise of short-sellers
The market needs more scepticsThe Wirecard scandal