Distressed investment opportunities and challenges in European real estate
Real estate has been at the heart of the global banking crisis. As banks seek to de-leverage their real estate loan books, investors and new debt providers are seeing a variety of opportunities and challenges.
A panel of bankers and investors was recently convened in London by the global law firm, Jones Day, to discuss and debate European real estate finance. The discussion centred on:
The differing approaches in the US and Europe to dealing with over-leveraged banks
The difficulties for European banks in de-leveraging in the current macro-economic environment, with a particular focus on the eurozone crisis
The effect of regulatory changes on real estate finance in Europe and the opportunities for debt funds, insurers and private equity investors
How new financing will be structured and distributed into the credit markets
The varying fortunes of the peripheral economies in the Eurozone
The panel comprised:
William Ackman, chief executive, Pershing Square
John Barakat, head of real estate finance, M&G Investments
Gad Caspy, head of commercial real estate EMEA, Deutsche Bank
Wilbur L Ross Jnr, chairman and chief executive, WL Ross & Co.
Max Sinclair, head of UK division, Eurohypo
Van Stults, managing director, Orion Capital
The event was organised by Jones Day partners, Andrew Barker (London) and Corinne Ball (New York).
Barker said: “Banks in 2012 are still highly leveraged with significant over-exposure to real estate. It is taking time for them to work through their loan books because resultant losses use up equity capital.
“This inability to clean up their balance sheets means that banks are struggling to extend fresh credit to investors. The alternative, more immediate, solution would be a full-scale recapitalisation or restructuring of the banking system which, with the current sovereign debt crisis, would present tremendous difficulties in Europe.
“The problem is not that the banks do not have enough capital; rather that they have too much of the wrong type of capital: debt. Usually when companies find themselves in that situation they would be restructured by converting their debt into equity. Yet subordinated creditors of essentially insolvent banks have been bailed out by taxpayers. Governments around the world have taken this approach due to the systemic risk posed by the banking system, which has been exacerbated by the absence of a coherent and co-ordinated regulatory framework for global financial institutions.
“Increased regulation is pushing banks to hold more capital against real estate loans and is making it more expensive for banks to avoid dealing with loans that are in technical default. At the same time, the new Solvency II regulations are increasing the attractiveness of real estate lending for insurers. However, the main attraction for insurers is the risk adjusted return available from senior lending.
“Investors are starting to consider the risk of eurozone break-up and its impact on contracts. This type of political risk is now a consideration for foreign investors.
“The leveraged finance market has long been originated by underwriting banks and distributed to credit investors such as collateralized loan obligation (CLO) managers. The key form of credit distribution for real estate markets was commercial mortgage-backed security (CMBS). However, there has been little new issuance in this market and the difficulties in restructuring existing transactions has made it challenging for banks to revitalise the securitisation market and create a product that appeals to investors such as pension funds and insurers.
“The loan syndication market is coming back, and whilst many deals are still “club deals” put together by a small group of banks, we are gradually seeing more syndicated deals where one bank will underwrite the loan and sell down to other lenders.”
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