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- Charlie Munger warned of a nationwide pullback in lending to the commercial real estate industry.
- Warren Buffett's partner said investors face stiff competition and an interest-rate headwind.
- Munger took aim at money managers, comparing many of them to "fortune tellers or astrologers."
A credit crunch has gripped America's commercial real estate (CRE) sector, and investors face a tricky combination of fierce competition and downward pressure on asset prices, Charlie Munger has warned.
"Every bank in the country is way tighter on real estate loans today than they were six months ago," Munger told the Financial Times in a recent interview.
Warren Buffett's 99-year-old business partner and Berkshire Hathaway's vice-chairman suggested banks may be pulling back from lending to the industry because they view it as too risky. He flagged that many of them have suffered painful blows to their loan portfolios from declines in real estate prices, and pointed to office buildings and shopping centers as particular headaches.
The collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank in recent weeks has stoked concerns of a wider credit crunch. Lenders, facing the prospect of further bank runs and fresh blows to their loan books and bond portfolios, have scrambled to shore up their finances in part by cutting back on loans and imposing stricter requirements.
The CRE industry is widely viewed as especially vulnerable to a credit crunch. Real estate investors rely heavily on debt, which has grown more costly thanks to rising interest rates. Moreover, property prices are under pressure from the remote-working trend, and higher yields from bonds and savings accounts reducing the appeal of riskier assets.
Munger bemoaned that investing overall is tougher today than a few years ago. The Federal Reserve has raised interest rates from virtually zero to about 5% over the past year or so in a bid to curb historic inflation. However, its hikes are squeezing consumers and businesses by increasing borrowing costs. They also threaten to pull down asset prices, erode corporate profits, and drag the economy into a recession.
At the same time, the rollout of zero-commission trading apps and a sharp rise in the number of cash-rich institutional investors has made it harder to score outsized returns than in the past.
"At the exact time that the game is getting tougher we've got more and more people trying to play it," Munger said. "There's too much private equity, too many buyers of all kinds … it's making it a very tough game for everybody."
Munger complained there's an excessive number of money managers in the US. He blasted them as little better than "fortune tellers or astrologers," and accused them of taking cash from clients while providing nothing of value to them.
The billionaire investor's gloomy outlook echoes Buffett's recent warning that it's a "tougher world out there for a great many businesses." The Berkshire CEO also noted that bigger bond yields threaten to weigh on the prices of stocks and real estate, and both inflation and recession can "cause a lot of trouble."