Friday, March 19, 2010

Europe's Commercial Real Estate Timebomb?


Graham Ruddick of the Telegraph reports that Europe facing commercial property timebomb (HT: John):
Europe faces a commercial property debt timebomb with almost €1 trillion (£896bn) outstanding from the sector and a quarter of that potentially distressed.

The UK accounts for 34pc of the €970bn total, with Germany second with 24pc, new research shows.

The scale of commercial property debt in the UK, and the precarious nature of much of it, has been flagged by the Bank of England and the Financial Services Authority as a threat to the recovery of the economy and the banks, but the report by CBRE highlights that it is an issue for most of Europe.

According to the property agent, €207bn of the debt is secured at high loan-to-value ratios on poor quality real estate, and is therefore most at risk of not being repaid. Of this, €89bn, or 43pc, is from the UK, and €69bn from Germany.

Also, the debt is maturing at a rate of €155bn a year, meaning almost half will have matured by the end of 2012.

There are concerns about the repercussions of the outstanding debt following sharp falls in commercial property values since 2007, which has put pressure on loan-to-value covenants and eroded equity. Tenant failures and declining rents have also affected income for property owners.

Natale Giostra, head of UK debt advisory at CBRE Real Estate Finance, said: "Germany and the UK saw some of the highest levels of gearing at the top of the market in 2006-07 and so are likely to have a higher proportion of problem debt arising from highly geared loans."

What banks do with distressed property assets on their balance sheets is the key topic of discussion at the annual Mipim property conference in Cannes.

Dennis Watson, managing director of property and project finance at Barclays Corporate, has said the banks are likely to increasingly turn to joint venture and asset management agreements with property companies to nurse their assets back to health.

One leading agent in Cannes with knowledge of the loanbooks of Royal Bank of Scotland and Lloyds stressed they had major exposure to secondary offices and shopping centres outside London – an area where demand from buyers remains weak – meaning widespread asset sales would be difficult.

Robin Hubbard, executive director of CBRE Real Estate Finance, said banks could take 10 years to unwind their exposure to distressed commercial property.

No worries, I am sure Canadian, US, European and Asian pension funds will be buying European commercial property at "distressed prices". Only problem is that they might be sitting on those properties for a lot longer than they bargained for. And then there is that nagging issue of US commercial real estate, which seems to headed towards a crash of unprecedented magnitude.

Pension fund managers will tell you, "don't worry, pensions invest for the long-run". True, but in the meantime, they're going to get creamed on their commercial real estate holdings and they need to find a way to make up for those losses in liquid public markets, which will also suffer if banks cut risk to bolster their balance sheets. Correlations always come back to haunt you at the worst of times.

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