Crisis in Store for Euro Commercial Properties

April 07, 2011 / Elizabeth Buckley, Commercial Property Analyst

A study by US-based advisory firm Navigant revealed that £500B-£600B ($816B-$980B) of commercial mortgages made by the UK and European banks and financial institutions are bound to be refinanced in the next two years.

Crisis in Store for Euro Commercial Properties

Navigant explained that institutions previously positioned to make the loans either do not exist today or have increased lending standards subject to compliance with Basel III.

European banks are also expected to abandon commercial real estate holdings because of increased delinquency rates and ballooning loan maturities.

When delinquencies increase, the number of transactions in the watch list remains constant with bank headcount and monitoring capabilities. The percentage of delinquency loans being actively monitored is very low- less than 10% of 10-day delinquencies.

The numbers of loans set for maturing are also expected to double next year just as the strength of the collaterals underlying them fall steeply. This applies both to the collateral used in the earlier years and to the broader market.

Navigant director John Lasala said that the days of kicking the can on commercial property loan refinancing are coming to an end. The institutional pressure to exit non-core real estate assets increase due to spiking delinquencies, ballooning maturities and increased liquidity requirements of Basel III.

Lasala also added that interest rates, which are expected to rise in the future, pose another significant threat to the British and European market.

Hedge funds also face the same situation. The 2/20 compensation structure correlates directly with assets under management. The mark-to-believe mantra has made a lot of investors and competing fund managers disgruntled- the higher the mark or stated value of the asset, the higher the take-home-pay.

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