Plans to mop up US$24 billion in bad bank loans may deal another blow to Taiwan's over-priced property market -- and take down bank stocks in their wake.
The reason: Asset management companies buy bad loans at steep discounts and are also likely to sell the real estate that the money was loaned to buy at a fraction of face value.
"Asset management companies are a necessary evil to save the banks from bad loans, but they do have side effects," said Hua Ching-chun, who surveys real estate for the interior ministry. "The property market is awaiting further price declines."
That's bad news for developers already swamped by 1.2 million excess homes. And as they fall behind on debt repayments, the banks than loaning them the money could be further squeezed. An index that tracks financial firms sank 17 percent in three months, double the decline in the key TWSE Index.
Not for the first time, Taiwan policymakers may find themselves boxed in by demands for reform even as markets slide.
The finance ministry is pushing a bill through parliament to ease asset transfers and tighten bankruptcy rules, and invited Goldman Sachs Group Inc, Lehman Brothers Holdings Inc and Morgan Stanley to help form asset management companies.
The government, for its part, is trying to reassure investors that it can clean up bad debt without hurting property prices.
"Asset management companies will repackage property to increase its value rather than become price breakers," said Vice Minister of Finance Sean Chen (陳沖).
As the government tries to merge more than 350 banks and credit cooperatives into fewer, stronger companies, however, parliament is caught up in its own partisan squabbles.
Legislators may be reluctant to act in an election year because any tumble in property prices wouldn't be popular with voters.
Some bankers and developers are even turning to archrival China for help. Last month, the Taiwanese government said it may allow mainland Chinese and foreigners to buy real estate on the island.
"Mainland investment will help absorb a flood of properties," said Lee Yung-san (李庸三), chairman of the International Commercial Bank of China (中國國際商銀). "The government must strike a balance between resolving bad loans and protecting the property market from a meltdown." Inadequate disclosure and cross-purchases of bad loans could sidetrack the cleanup and spare the property market, said Lin Tsui-pin, who helps manage NT$45 billion in Taiwan stocks at Prudential Securities Investment Trust Co (保誠投信).
"The government will not go too fast on banking reform, running the risk of hurting other industries," Lin said.
Real estate prices rose with a stock market bubble beginning in 1986. When the stock market collapsed, plunging 80 percent, property owners refused to sell their real estate on the cheap.
As a result, property prices have fallen just 20 percent after quadrupling in the late 1980s.
Fire Sale Developers, fearing the worst, are moving as quickly as possible to sell real estate.
Crowell Development Corp (
Crowell has since halved the asking price for completed, unsold apartments valued at NT$1.4 billion (US$43 million) in Kaoshiung in southern Taiwan.
"The market is bad enough to squeeze out marginal developers, but the outlook is still downhill," said Crowell Vice President Chen Hui-mei (
The 53 members of the Bankers Association (
Banks could dump assets on the management company at artificially high prices. That would avoid depressing property prices at the cost of further erosion of collateral and credit quality.
It's an approach that doesn't sit well with some investors.
"You have to suffer a bit in reforms," said Prudential's Lin.
"Attempting to hide problems with ambiguous transactions will only create a downward spiral."
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