04 June 2010

UBS report says further pressure on small-to-medium-sized banks and economic growth is inevitable

Commercial real estate loans totalling $2 trillion will mature globally during the next four years and around half of this debt — $1 trillion — is already under water, UBS Global Asset Management figures show.

In its Big Payback report published last week, which focuses on global commercial real estate debt, UBS said the largest loan losses for global banks were projected from 2011 onwards and could range from $400bn to $500bn.

“The stress tests conducted last year for 19 major financial institutions examined their capital reserves only through the end of 2010,” UBS said. “Even more significantly, small and mid-sized banks were never subjected to any exercise comparable to the stress tests, despite the fact that small and mid-sized banks are proportionately even more exposed than their larger counterparts to commercial real estate loans [see graph].

“This is as true in the US as it is for smaller markets in Europe, such as Spain.”

It said that debt made up more than 60% of the global real estate capital market holdings at the end of 2008.

This was because there was an 80% growth in global real estate debt from 2003 to the peak in the fourth quarter of 2008. Much of this lending was originated or refinanced towards the peak of the market in 2006/07 with loan-to-value ratio covenants of more than 75%.

The result of this lending boom was that governments and the global business sector were, it said, “left working to answer two big questions: how to prevent similar crises and how to guide their economies through the looming process of debt reduction, or deleveraging”.

Research house Real Capital Analytics estimates there are $230bn of troubled global real estate loans — where a mortgage is delinquent or in default, liens have been filed, foreclosure is in process, or an administrator, receiver or special servicer has been appointed.

Most of these — $168bn — are in the US, but there are also large concentrations in the UK ($15bn), Australia ($2.5bn), Spain ($5.2bn) and Japan ($2.8bn).

“We would expect many years of real estate debt reduction in many of the world’s largest economies, and this process is likely to exert a significant drag on recovery prospects. The commercial real estate deleveraging process has barely begun,” UBS said.

The deleveraging process has not begun because of record-low interest rates and record increases in government debt.

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Source: Property Week (www.propertyweek.co.uk)