COLUMN-Crisis looms for commercial real estate in Europe

— Keith Mullin is Editor-at-Large, IFR, a Thomson Reuters
service. The opinions expressed are his own —

By Keith Mullin

LONDON, July 29 (IFR) – Investors have started once again to
circle European commercial real estate on the back of relative
price improvements from the nadir of mid-2009 and in view of
attractive yields.

This follows a protracted period of inactivity as prices
fell dramatically from their highs in parallel with the meltdown
in the global banking sector. But is this new-found confidence
built on solid foundations, or will it be blitzed by the coming
credit crunch that could send the market into a tailspin in a
property double-dip?

To the astonishment of lenders, sentiment towards European
commercial property is improving. Bankers are convinced,
however, that the positive sentiment is wilfully ignoring the
scale of future trouble caused by the lack of available
financing. There is a sense that insiders are talking up their
own market and that the property vehicles that have been
opportunistically raising money since the second half of 2009 to
ride the waves of low asset prices and improving fundamentals
will be gravely wrong-footed if the property double-dip scenario
materialises.

To deal with an expected wave of distress, restructuring
boutique Alvarez & Marsal (A&M) established a European real
estate advisory practice in June and hired Scott Morey to head
it up. Michael Camp, head of A&M’s global real estate advisory
business, is in no doubt that work will gravitate towards the
turnaround and restructuring universe.

Camp points to what he calls the staggering amount of real
estate debt coming due over the next few years in Europe. A&M
plans to assist companies dealing with distressed real estate,
providing transaction advisory, performance improvement and
restructuring work for stressed companies.

In similar vein, CB Richard Ellis (CBG.N: ) hired Adrian
Phillips earlier this year from Lambert Smith Hampton as a
director in its rapidly growing Recovery and Restructuring
Services practice, in which capacity he will be working
alongside insolvency practitioners and banks.

FALSE OPTIMISM?

Real estate services company DTZ (DTZ.L: ) reckons the worst
of the property slump is over. Its investor and lender surveys
suggest an increase in confidence. Lenders told DTZ they expect
to increase gross new lending in 2010 and 2011.

But there are surveys and there’s reality. Those findings
are impossible to reconcile in discussions with bankers. Asked
directly about refinancing commercial real estate debt, most
lenders gulp anxiously and look away.

The lack of confidence that the tidal wave of debt will be
refinanced in orderly fashion is startling.

The numbers certainly paint a picture.

Syndicated lending to EMEA real estate companies in the
first half of 2010 amounted to a little over $2 billion,
according to Thomson Reuters data. This is tracking below 2009
annual totals of $7.4 billion and way off the 2008 total of $45
billion.

The debt issue is hardly a secret, but investors seem intent
on ignoring it. Property opportunity funds and other vehicles
have mobilised large volumes of equity since the second half of
2009 to take advantage of what they see as unmissable
opportunities to snap up assets cheaply in anticipation of a
ramp-up in prices.

DTZ says there is around 116 billion euros ($150 billion) of
new equity looking to take advantage of funding shortfalls and
acquisition opportunities.

A case in point: BMB Group, the investment and advisory firm
founded by Asian entrepreneur Rayo Withanage and Brunei Prince
Abdul Ali ‘Yil-Kabier, is aggressively building out its European
real estate platform, aiming to add 3 billion euros in assets
over the next two years. In June alone, BMB acquired
Paris/Luxembourg-based principal investors and advisers
Contrarian Capital Partners and subsidiary Beacon Hospitality
Partners SARL as well as Dutch property fund manager Alliance
Capital Group, which has 4 billion euros of property under
management, mainly in the Netherlands and Germany.

Because BMB is a major investment conduit for Asian and
Middle East sovereign wealth funds, family offices and high net
worth individuals, the firm’s rapid-fire build-out infers
interest in European commercial property among BMB’s clients.

In the UK, Great Portland Estates (GPOR.L: ) (175 million
pounds ($272 million)), Shaftesbury (149 million pounds), Max
Property Group (200 million pounds), Metric Property Investments
(175 million pounds), Invista Foundation Property Trust (12.3
million pounds) have all tapped the public equity market in the
past year or so.

LXB Retail Properties is in the market again for 40 million
pounds, having already committed the 110 million it raised from
its October 2009 AIM/CISX listing.

Elsewhere, investment funds are moving out of cash and are
actively sourcing assets. The Eaton Special Opportunity Property
Fund is typical. The fund manager believes the market offers
“exceptional investment opportunities”. Others are adding
firepower to their efforts.

AllianceBernstein, to name but one, recently hired real
estate veteran Paul Vosper in London from Morgan Stanley, and
sees “widespread opportunities in many real-estate markets as
the economic and capital-market downturn has undermined
valuations for a multitude of properties — even those with
sound long-term prospects”.

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COLUMN-Crisis looms for commercial real estate in Europe