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This week's near collapse of German lender Hypo Real Estate, one of the biggest commercial property lenders in Europe, has sent shockwaves throughout European property markets and threatens to send asset prices tumbling. It was Hypo's failure to refinance its public sector lending arm Depfa, rather than the quality of its property lending book, that caused the trouble. Nevertheless, the German government's €50bn (£39bn) bailout will not be the end of its woes given the liquidity crisis engulfing Europe's commercial property markets.
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The credit crunch sounded the death knell for commercial mortgage backed securities - the so-called 'slicing and dicing' of debt used to spread the risk of highly leveraged property transactions. This has pushed debt-backed buyers out of the market and transaction levels have slumped, especially here in the UK. Depending on who you believe, commercial property values in the UK are down 20 to 30 per cent from their 2007 peak, and Hypo's problems means Europe could soon face a similar fate.
Before the problems at Hypo, German banks were the last bastion of European real estate financing, as their inter-bank liquidity was preserved by ultra-safe covered bonds known as Pfandbriefe. A survey of European lenders conducted by property consultant Savills this week showed that only 16 banks currently have the liquidity or the guts to lend on commercial property transactions above £50m, and half of those are German banks.
But with faith in the Pfandbriefe model now rocked by events at Hypo, property sentiment has crashed to a new low, shattering assumptions that continental Europe would escape a savage re-pricing. Nowhere is this more apparent than Paris, where Lehman Brothers' €2.1bn top-of-the-market purchase of Coeur Dèfense, Europe's largest office complex, could become Europe's largest distressed property sale. The market turned before Lehman could complete the securitisation of the deal, which means it is likely to be sold off at a substantial discount as the failed bank's assets are unravelled.
More shocks to the property system reinforce our previous view that now is not the right moment to buy shares in property companies. But, in time, market turmoil will present fantastic opportunities for those left standing (see the stock screens page for more on property funds trading at cavernous discounts)
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-IC-1.5.4a-prod - 31/10/2008 13:11:34 - carlos.princz
