Deleveraging the Commercial Real Estate Market

The European commercial real estate market is facing one of its most difficult periods for some time.

Executive Summary

Banks worldwide – subject to government bailouts for survival – are in a capital preservation mode, leading to a general retreat from commercial real estate lending.
This conservative behavior is a sharp reversal from the excesses of 2003 to 2007, when debt financing of real estate grew by 58% in the private market and 150% in the public market. The lack of debt capital has led to a drop in investment sales activity.
As a result of falling values, property owners in Europe may need an estimated €105 billion of additional equity by the end of the year to prevent loan-to-value (LTV) covenants from being breached. Depending on how far values fall and how banks react, the cumulative shortfall could top €200 billion by 2011.
Of more immediate concern are the debt markets, which are likely to shrink. Based on the expected volume of debt maturities and origination in Europe, a debt shortfall of €79 billion could emerge in 2009, reaching €109 billion by 2011.
The subsequent distress will give rise to investment opportunities, particularly in terms of financing real estate transactions. This is likely to be most pronounced in the real estate markets of the UK, Spain and France.