Source: Insurance Journal —
Turmoil at trophy properties in London and Frankfurt offer a glimpse of the damage awaiting European real estate investors as they face the sharpest reversal on record.
From a fraught refinancing process for an office building in the City of London to the strained sale of the Commerzbank Tower in Germany’s financial hub, investors are scrambling to find ways to bridge financing gaps as lending markets seize up from rapidly rising interest rates.
The reality check will start to hit in the coming weeks as lenders across Europe get results of year-end appraisals. Hefty declines in valuations threaten to cause breaches of loan covenants, triggering emergency funding measures from forced sales to pumping in fresh cash.
“Europe is going to go through the great unwind of 10 years of easy money,” said Skardon Baker, a partner at private equity firm Apollo Global Management. “The amount of distress and dislocation is off the spectrum.”
Loans, bonds and other debt totaling about €1.9 trillion ($2.1 trillion) — nearly the size of the Italian economy — are secured against commercial property or extended to landlords in Europe and the UK, according to the European Banking Authority, a survey by Bayes Business School and data compiled by Bloomberg.
Roughly 20% of that, or about €390 billion, will mature this year, and the looming crunch marks the first real test of regulations designed after the global financial crisis to contain real estate lending risks. Those rules could end up making a correction steeper and more abrupt.
“I think the revaluation will happen more quickly than in the past,” said John O’Driscoll, head of the real assets business of French insurer Axa SA’s investment management unit. “People are starting to get exposed as the tide goes out.”
Europe’s lenders will be prodded by the new regulations to act more aggressively on bad loans. They’re also in better shape than during the last real estate crisis more than a decade ago, so could be less inclined to allow issues to fester. That puts the burden on borrowers.
Rules of the Game
| What Changed | Why It Matters |
| Banks must book provisions for expected, rather than accrued, losses | No more “extend and pretend” |
| Loans with covenant breaches incur higher capital charges | Prods banks to act quicker on bad loans |
| German retail investors must wait up to a year for redemptions from real estate funds | Allows for more orderly asset sales |
| French real estate funds must hold at least 25% of funds in cash or equities | Provides liquidity buffer |
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