Affordable Housing Institute : US

“The only thing worse than being talked about

Is not being talked about.”

– Oscar Wilde

This is how I assure I am talked about

 

Foreclosure summons up in our minds the most heartbreaking bathetic images:

 

 

In financial terms, foreclosure is the death of a venture: the owner loses the property, the lender recovers its collateral, tenants are often evicted, buildings may fall into disrepair.  Foreclosure is reviled because nobody wins, everybody loses.

 

Money gone, people gone, community gone

 

Yet, foreclosure — like its entrepreneurial cousin, bankruptcy — serves a financial purpose, one whose societal value comes into focus only when one examines an alternate universe without foreclosure. 

 

Such as, of all places, Bangkok, as unwittingly illustrated in this Wall Street Journal story:

 

BANGKOK — One recent steamy afternoon, a shirtless man named Nop tossed out chunks of putrid meat for the dozen stray dogs that share his home, an open-air encampment inside the unfinished 47-story Sathorn Unique tower.

 

 

When a lender forecloses, what happens financially?

 

The property’s value is reset to true market.  Either the lender takes the property back and resells it, or someone steps up at the auction and plunks down hard cash. 

 

“According to my sophisticated analysis, it ain’t worth much”

 

Either way, the loan is extinguished. 

 

No more payments due

 

Clearing this debt overhang is critical, for if a property is encumbered with vastly more debt than it is worth, no one will buy it.  Like the curse of too much value, too much debt is likewise a curse, as nothing happens to the property.  While nothing happens, the property loses value:

 

Ten years ago, Sathorn Unique was destined to be one of the city’s glitziest addresses. Today, its Corinthian columns and four-story arches are nearly lost amid a tangle of trees and vines.

 

Deterioration is not merely financial but also physical.

 

Although workers completed the building’s basic structure all the way to the top, its concrete shell starts to peter out about 20 stories up, leaving exposed metal and a half-finished dome on the roof.  Steel bars jut out in all directions and mounds of refuse litter the grounds. Inside, two out-of-service escalators climb to nowhere and the smell of urine is overpowering.

 

The capital backlog required to address the property increases rapidly:

 

Engineers say many incomplete towers can’t survive much longer than 10 years in Bangkok’s blistering tropical heat and rain before suffering significant structural damage. The buildings won’t necessarily fall down, but the cost of repairing or reinforcing their rusted-out beams becomes prohibitively high.

 

Failure to foreclose arises for many reasons, one of the most common of which is a sudden price inversion.  In the twinkling of a reporting-period eye, the property goes from having a large perceived positive equity to having a perceived large negative equity. 

 

The building is one of a dozen or more major “ghost” structures that haunt Bangkok’s skyline. Many of them were started in the mid-1990s when Thailand’s economy was booming. Developers envisioned a city of gleaming office and residential skyscrapers symbolic of the nation’s rapid development; not that long before, the tallest buildings in the city were Buddhist temples. Then Thailand sank into a swamp of reckless investments and unpaid debts that became known as the 1997 Asian financial crisis.

 

(One wonders if all the cranes in Shanghai and Chongqing may be building the next decade’s ghost towers?)

 

Memento mori?

 

Launched by a Thai conglomerate called SV Group and a Hong Kong architect named Eric Lai, SV Garden was supposed to help transform the area into Bangkok’s new financial center. The developers were so confident that they decided to build multiple towers — some more than 35 stories high — all at the same time.

 

The price inversion is often triggered by wholly external factors:

 

They blanketed the city in advertising and pre-sold a large percentage of the condominium units. But in early 1997, one of the project’s 11 lenders failed, triggering a freeze on funding, Mr. Lai recalls in an interview.

 

No more loans for you

 

Very often a financial tourniquet abruptly makes the problem much worse.  (Such credit shrinkage not only precipitated the Great Depression but also exacerbated it.)

 

The developers eventually stopped construction, leaving the shells of four major towers partly clad in concrete. Condo buyers were furious. Mr. Lai and others had to scramble to sort out the mess.

 

I’m so mad I could just sue somebody

 

If a property is not foreclosed, then a very curious double-denial arises.

 

·         The lender pretends that everything is fine, and the lender has no involvement.

·         The owner, who has long since lost any hard equity he might have had in the property, maintains nominal control but is actively incentivized neither to invest nor even to acknowledge ownership.

 

Notice the property, have your money turned to stone

 

In Thailand’s labyrinthine bureaucracy, it can be hard to trace the last owners of the projects, and government officials routinely refuse to disclose information about them.

 

Both parties avert their eyes from the property’s problems, so it lingers, neglected, a blot on the balance sheet, a civic eyesore.

 

Bangkok also has plenty of land, so it is easier for developers to sidestep the ruins of yesteryear instead of tearing them down. Thailand’s mellow brand of Buddhism may even play a role, some say, because it leaves people somewhat complacent about the unfinished buildings despite the occasional chunks of metal and steel that rain down during storms.

 

With large unrealized losses on the financial institution’s balance sheet, it becomes ever harder to fess up to the mistake.

 

But as many as one-fifth of the projects that were interrupted in central Bangkok are still not completed, and many may never be. Some don’t really count as full-fledged urban ruins, since they were in the very early stages of development when work ceased. For the big ones, it’s becoming increasingly difficult to restart work.

 

Remarkably, no one wants to be the owner. 

 

Eventually, the case moved into the hands of a Thai bankruptcy court, which appointed an independent administrator to manage a reorganization. 

 

It’s on the top of our In Box

 

At about the same time, new investors considered redeveloping the project, people familiar with the matter say, but some of the creditors held out for a better deal and now some condominium owners refuse to consider anything less than a full return on their investment. No serious new investor has emerged.

 

The result is a building that has negative value — it is worth less than the uncleared land, often quite a bit less.

 

Yes, I’d pay something to make that go away

 

That has a civic cost; development flows away from the dead matter, and the city suffers.

 

Then there’s the unfinished elevated commuter train, whose hundreds of abandoned rail supports march through the city like giant dominoes. The so-called “Hopewell” rail project died in 1997, too.

 

City growth is hurt:

 

The unfinished towers of SV Garden loom over what was to become the new financial center of Bangkok.

 

Unforeclosed buildings, as they fall into disrepair, also become visible symbols of lack of accountability:

 

Courts and government officials haven’t been eager to force bankrupt owners to unload their properties or resolve continuing legal disputes, which could have paved the way for faster redevelopment.

 

 

This undermines confidence in government:

 

Many influential families were able to hang onto their dud assets after the crash even after it became clear they would never restart them.

 

SV Group, which is linked to a powerful Thai family, continues to run a large steel company. It didn’t respond to requests for comment.

 

Urban land, to be productive, must be developed, and redeveloped to its highest and best use. 

 

The country’s economy contracted 10% in 1998, and many of the building projects came to a crashing halt. In the decade since, Thailand has more or less recovered. The economy is growing again, traffic gridlock has returned to the streets of the capital, and shiny new malls are sprouting up everywhere. But many of those who failed in the crisis either can’t be bothered or can’t afford to restart their building projects, leaving Bangkok with more modern ruins than probably any other big city in the world, according to architectural experts.

 

Unforeclosed property cannot be redeveloped, damaging the city, which loses ground to its competitor cities — or countries:

 

As he picked at a tuna sandwich in a Bangkok hotel café, Mr. Lai said he lost “a lot” of money in the project but declined to be specific. He says he’s no longer involved in SV Garden but still hopes it will flourish — someday. “Over time it gets more difficult,” he admits. “But I hope it happens.”  In the meantime, he is developing projects in Malaysia and Pattaya, a busy beach resort southeast of Bangkok.

 

The urban hulks remain, mute testament not just to development exuberance but to the failure to foreclose. 

 

At least, Nop says, “the building won’t collapse.”

 

It would be better if it did.

 

The best thing for it

 

 

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