Berkshire's Charlie Munger predicts imminent trouble for US commercial property market

Charlie Munger

The vice-chairman of Berkshire Hathaway Charlie Munger has warned investors of serious challenges the US property market faces and its potential to unravel if things go out of hand.

The legendary investor said US banks were packed with “bad loans” that will be vulnerable as “bad times come” and property prices fall, in a recent conversation with Financial Times.

Munger’s warning comes as US regulators are still in consultation with financial institutions like JP Morgan and Bank of America for their best and final takeover offers for the First Republic Bank, the latest in what has been a very difficult period for midsized US banks due to the ongoing rate hike cycle of the federal reserve. “It’s not nearly as bad as it was in 2008, but trouble happens to banking just like trouble happens everywhere else. In the good times you get into bad habits. When bad times come they lose too much,” Munger said.

Since the failure of the Silicon Valley Bank in March, attention has turned to First Republic as the weakest link in the American banking system. Shares of the bank tanked 90 percent last month and then collapsed further this week after First Republic disclosed how dire its situation is.

“A lot of real estate isn’t so good anymore. We have a lot of troubled office buildings, a lot of troubled shopping centres, a lot of troubled other properties. There’s a lot of agony out there,” Munger said on the issue of the US real estate market.

Berkshire Hathaway has a history of stepping in at the last hour of crisis investing large sums through smartly structured deals in some of the best-run financial institutions. Back is the days of the 2008 Global Financial Crisis, the sprawling insurance behemoth invested $5 billion in Goldman Sachs, and a similar sum in Bank of America.

Still, Berkshire has so far stayed on the side-lines of the current bout of turmoil, during which Silicon Valley Bank and Signature Bank collapsed. “Berkshire has made some bank investments that worked out very well for us,” said Munger. “We’ve had some disappointment in banks, too. It’s not that damned easy to run a bank intelligently, there are a lot of temptations to do the wrong thing.”

Brief history of Charlie Munger

Charlie Munger, born on January 1, 1924, is an American billionaire investor. He is vice chairman of Berkshire Hathaway, the conglomerate controlled by Warren Buffett; Buffett has described Munger as his closest partner and right-hand man. Munger served as chairman of Wesco Financial Corporation from 1984 through 2011. He is also chairman of the Daily Journal Corporation, based in Los Angeles, California, and a director of Costco Wholesale Corporation. Forbes estimates his wealth at $2.4 billion.