The European commercial real estate sector could be facing a financing black hole of up to €700bn as banks slash their lending activity to the sector.
New research from Morgan Stanley estimates that banks could “let go” of between €300m and €600bn of commercial real estate loans over the next few years in a stark representation of the deleveraging process.
This is up to a quarter of a total of €2.4tn of commercial real estate loans held by around 150 European banks, of which UK, German and Irish banks are unsurprisingly the largest lenders.
The finance gap is exacerbated by the spike of maturing commercial mortgage-backed securities in the next two years, as well as an equity drain from the liquidation of open-ended funds, which could add a further €100bn of exposed debt.
The research dismisses any suggestion of a rescue by alternative players, such as insurance companies and private equity funds, which Morgan Stanley believes can only provide a maximum of €200bn of finance – and on a selective basis.
It warned: “Unless another unexpected capital source arises, this would suggest at least some price decline for European commercial real estate assets in order to ‘make up’ the gap. It remains unclear to what degree this decline will be absorbed by lenders as writedowns versus current owners as asset values decline.”
Because of the scale of problem and the need for “synchronisation across several countries”, Morgan Stanley believes the deleveraging process is a structural issue that could take 10 years to resolve, rather than being a five-year cyclical process.
It also sees banks as the relative losers in the process as they are left with a back book of long-dated loans that will be a drag on profitability, and which may still require value adjustments.
bridget.o’connell@estatesgazette.com
