98% loss for Goldman Sachs property fund

Goldman's Whitehall Street International property fund has lost almost all of its $1.8bn value - ouch.

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Last Updated: 31 Aug 2010

The fund, which was raised back in the carefree days of 2005 when it seemed as though property prices might rise forever, invested more than half its cash in the US real estate market. By the end of last year it was reported to be down to its last $30m, a loss of about 98% cents on the dollar - a sobering reminder of just how badly the property market has tanked in the intervening five years.

The fund’s collapse is the latest in a string of US real-estate related financial woe, including a similar Morgan Stanley property fund which has lost some two-thirds of its $8.8bn value. The practice of ‘jingle mail’ has even spread to Wall Street – the term coined for property owners who are so far under water on their loans that they post the keys back to the bank and simply walk away. Only this time it’s banks mailing the keys back to other banks. And you thought the property market was bad here in the UK.

Of course, although the US real estate market has been ravaged by the recession, prices have not fallen on aggregate by anything like as much as 98%. The reason why this fund - and others like it – have taken such a beating is because of their reliance on debt. Leverage is a reversible process – on a rising market debt gearing helps to multiply gains, but on a falling one it does exactly the same to losses. With potentially dire consequences for investors.

Goldman Sachs was Whitehall’s largest investor, to the tune of $436m, so is consequently taking the worst bath – although since the rest of the bank’s operations have been doing very nicely thank you recently on the back of the vast US fiscal stimulus, this little local difficulty probably won’t bother Goldman's boss Lloyd Blankfein too much.

Looking on the bright side, it’s possible that the current spate of paper losses will be seen as marking the nadir of the property crash, and that from here there is only one way to go. It’s also worth pointing out that as the fund still has some years to run – until 2014 to be exact – there is time for some of that eyewatering loss to be recouped by rising prices.

But despite that it’s safe to say that the fund’s investors are unlikely to see anything but a fraction of their initial stakes returned. The value of your investment, as it always says somewhere in the small print, may go down as well as up.

 

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