General Electric announced it would be unloading most of its GE Capital assets in a deal involving the sale of approximately $US26.5 billion worth of real estate.
We can’t help but wonder what that means that they’d be willing to unload so much real estate. Do they think the commercial real estate market is peaking? Do they think it’s about to collapse? If they think the economy is growing, why not wait?
Simply put, now was the perfect time because there was a buyer.
Let’s unpack this a bit. There are three points to expand on.
1. Commercial real estate prices are way up.
After crashing during the financial crisis, commercial real estate prices have roared back. According to a report from Green Street Advisors (via Forbes), prices are now 15% higher than they were at the top of the credit bubble. So, GE isn’t exactly taking a bath on this sale.
GE could wait and see if prices go higher. But why take the risk? Even assuming they are going higher, most economists are telling us that financing costs are likely to trend higher from here.
2. Borrowing costs are expected to rise.
Interest rates have been tumbling for basically 15 years. In other words, the bond market has been in a very long bull market. The ride’s definitely been a bit bumpier in the private debt markets than in the public debt markets.
Lately, economists and bond market gurus have had growing conviction that rates are going to trend higher in the years to come. Higher interest rates mean the cost of borrowing rises, which makes it more unattractive to finance any deal.
Still, why not wait a little? Rates are still low and prices are trending higher. It’s possible GE could get a better valuation.
3. There is a buyer.
This is probably the most underappreciated aspect of any transaction. And it’s something that becomes increasingly critical when you’re talking about bigger deals.
Generally speaking, we’re talking about market liquidity. Markets are more liquid when buyers and sellers can easily find each other and close deals at fair prices.
Keep in mind, an asset won’t sell just because it’s worth something. No matter how much something is worth, if there’s no buyer, then there’s no deal. This is the scary characteristic of illiquid markets. Oaktree Capital’s Howard Marks wrote about this last month:
“Sometimes people think of liquidity as the quality of something being readily saleable or marketable … But the more important definition of liquidity is this one from Investopedia: ‘The degree to which an asset or security can be bought or sold in the market without affecting the asset’s price.’(Emphasis added) Thus the key criterion isn’t ‘can you sell it?’ It’s ‘can you sell it at a price equal or close to the last price?’”
There were buyers for what GE was selling today. And when you’re talking about the sale of tens of billions of dollars worth of assets that you’re making a profit on you were going to sell anyway, then the right decision becomes clear.