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Global Property Lending Landscape Altered Forever

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Global property lending landscape altered forever

The days of easy borrowing and cheap real estate debt are gone for good, some of the world's top commercial property executives conceded this week.

Speakers at the Reuters Global Real Estate Summit in London said they had abandoned hopes of ever seeing a return to the halcyon days of credit that fueled an unprecedented bull run in property prices following the turn of the millennium.

With the world's economy in shreds after the near collapse of the banking sector, the global property market is facing a watershed period with grim growth prospects.

Executives are now bracing for permanent changes in the way they fund deals and lukewarm future relations with nervous lenders and investors, who either want to minimize escalating property losses or protect huge fortunes reaped during the boom.

"The lending market is basically dead," Ed LaPuma, president of U.S. real estate financing company W.P Carey said.

"There needs to be a very compelling reason for a lender to lend or else they look at every loan they have made in the last four years, shake their head and they say they have lost too much to go in for more," LaPuma said.

Once the darling of investors from Joe Public to national wealth funds and governments, real estate has suffered a massive fall from grace since hitting its zenith in 2007.

The asset class was pitched as a near-perfect hybrid between unexciting bonds and volatile equities, but is now broadly seen as the ultimate investment pariah -- trumping risky hedge funds, default-prone high-yield bonds and bombed-out stock markets.

This new-found infamy could restrict the volume of so-called big-ticket property deals that rely on high leverage.

"There was probably 70-80 billion pounds of new debt arranged in the years 2004, 2005, 2006 and 2007 but I can't see more than 25-20 billion pounds this year and next year," said Max Sinclair, head of UK lending at property lender Eurohypo.


While dealmaking opportunities slow to a trickle, some executives are trying to work out how they can help restore the battered reputation of a market that so many consider the source of the world's financial ills.

"Underlying the whole problem is $2 trillion dollars of loss in the financial sector around the whole world," Roger Orf, president of Citigroup Property Investors said.

"In terms of commercial mortgage losses, it's about $300 billion more, another incredible number. To cure this is a matter of years, not a matter of months," Orf said.

Some fear the slow rehabilitation of the credit market could curb growth of emerging property markets in Asia, Africa and Latin America, which rely on pioneering, debt-driven buyers.

"If you look at the banking sector response to this crisis, it appears that the further east you go, the more demanding your typical lender becomes," said Mike Sales, the London-based head of property at Henderson Global Investors.

Steve Smith, head of transactions and asset management at AXA Real Estate Investment Management said his firm had delayed its expansion into Asia pending an uptick in investor sentiment.

Similarly, Eurohypo has pulled out of 18 of its 28 national markets to refocus on core opportunities.

Even mature property sectors will have to learn to live with bland, expensive mortgage markets that bear closer resemblance to those seen in poorer countries.

Many investors believe they will only be able to borrow up to 60 percent of a building purchase price at best, with triple-digit margins on loans, longer lease demands and higher income to interest cover ratios.

"Banks have realized this is too risky, and that part of the problem they are having right now is they have been too accepting of high loan to value ratios," said Reinhard Kutscher, who chairs the board at Germany's Union Investment Real Estate.


Banks are wary of adding to their property risk burdens but several Summit guests believed they were unlikely to liquidate their positions and realize losses rashly.

"For UK banks, foreclosure is still very much a last resort. They want to manage these problem portfolios, either with the incumbent investor or a specialist adviser," Sales said.

"We have seen few foreclosures in the UK, Germany or France and I think that will remain the case," he said.

Sinclair confirmed his bank was making every effort to extend and rework loans to avoid unnecessary foreclosures, which he described as "an exercise in the destruction of value."

"We want to try and avoid that at all costs. When I started at National Westminster Bank in the early 1980s, they were still working through loans from the early 1970s," Sinclair said.

"I can see we will be doing the same, nursemaiding deals from 2005-2007 in the years to come," he said.

Others speculated this softly-softly strategy was borne of need, rather than choice.

"I had a meeting with someone yesterday who said that if all banks marked their real estate loans to market, they would basically be insolvent," LaPuma said.

"I don't know whether he's is right or wrong but I do know that real estate to most of them is a four-letter word."

HPI fuelled by cheap and easy 'liar loans' comes to its end. Good riddance.

Cash rich and savvy folks like a lot of you on here will be scooping up bargains in a few years time.

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Come on Sibs, Hamish, et al - let's have the alternative viewpoint...

...well, you see, this article is about commercial property, a notoriously volatile, cyclical, asset class, whereas good old british residential bricks and mortar is by far the investment ever known to man - it gives you massively spectacular returns in the good times & absolute bullet-proof solidity in the bad. unbeatable. especially in maidstone & aberdeen... blah blah blah
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