There will be a 12 to 24 month window of opportunity for investors as major banks, under pressure on all sides, unbundle their European real estate portfolios, says Jos Short, Executive Chairman of Internos Real Investors.
Short, a founding partner of the 1.5 billion owner-managed real estate fund management business, makes his prediction in the latest issue of the Internos strategic bulletin, 'the decisive eye'.
He adds that as the banks return to their core markets and sectors unbundling is likely to be carefully executed rather than abrupt to minimize the impact. But it will represent an enormous change in the banks' relationships with the real estate industry.
"The upturning economies of Northern Europe will see more of the unbundling action in early 2011, which is likely to create a 12 month opportunity for investors," he says.
"Initially this opportunity will express itself as seldom seen rental yields, leading to excellent growth in capital values but this will probably not be until 2013."
In addition, Short says: "Overleveraged and quoted small and mid-cap real estate businesses form a signal opportunity for the opportunistic investor or fund manager."
Pressure on the banks to unbundle will come from three phenomena:
- Bank business strategies and their attitudes to commercial real estate undergoing a fundamental change
- Global regulation of banks becoming much stricter with revisions to the Basel ll accords, the so-called Basel lll
- A significant peak in loan maturities in 2011 and 2012 for loans with swap arrangements contracted in 2006-07 at interest rates much higher than today's.
Having conducted a straw poll of [European] banks to find out how they think their competitors will approach the unbundling issue, Internos' key findings are as follows:
- Disentanglement from commercial real estate is judged the least harmful way to raise capital without going to shareholders
- Levels of commercial real estate lending are too high
- Exiting abruptly from other types of commercial loans may be drawn-out, can destroy any goodwill element of an asset and can be very unpopular politically
- Where real estate is wholly or partially owned by a bank, it will seek to sell the asset, wherever there is minimum impact on P&L
- Any 'reasonable' offer to take over or participate in loans in non-core areas will now be taken seriously whereas it might once have been spurned
- The regime of 'extend, amend and pretend' is not over but its days are numbered. If loan servicing is covered by income, banks will hold on until asset valuations move closer to the level of debt or until amortisation brings debt levels down
- The countries and regions most likely to see asset disposals are those that appear to have turned the corner out of recession. Consequently, we are far more likely to see offerings of quality commercial real estate in Germany, France, the Netherlands and Scandinavia and the now, once again upwardly mobile, areas of central London
- For the British banks, accounting for a theoretical 90 billion of the Euro capital shortfall, there will be over time an inevitable repatriation of funds.
In the last issue of the decisive eye, Internos identified Germany as a 'stand out' investment prospect in Europe, a stance it reiterates in the latest edition and broadens to include other European countries such as the Netherlands and France, which are predicted to benefit from the German effect.