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2010 will be ‘come to Jesus’ moment for US real estate

Despite fears the US real estate recovery will be prolonged owing to banks’ willingness to extend debt maturities and workout mortgages, ING believes mid-2010 will mark the start of financial institutions starting to offloading troubled assets.

US real estate will experience a “come to Jesus” moment from mid-2010, as banks and other financial institutions eventually start to unload troubled mortgages and assets into the market place.

Research specialists at ING Real Estate today said the current mentality of “extend and pretend” won’t continue long-term, predicting that banks may have recovered enough by the middle of next year, and built up enough reserves, to start acting on their problem assets.

Although banks would try to “dribble out” such deals, it would feel like assets were coming to the market “en masse”, owing to the sheer volume of distressed property in the US.

Speaking during a media briefing on the outlook for US real estate, David Lynn, managing director of research and investment strategy at ING Clarion, said:
“This won’t be like the 1990s, when there was an immediate crescendo of assets hitting the market promoted by federal government action, but the pace of product coming to market [from banks] will certainly pick up next year.”

Presenting the findings of ING's latest global real estate market overview report, Lynn said the US had experienced a year and a half of little to almost no transactions, in part owing to banks dealing with their legacy assets. Many banks have been accused of “extending and pretending” maturing debt and problem loans, particularly where debt service is still being covered even if the book value of the asset has declined substantially, because they don't want to own the underlying real estate or sell it for fire-sale prices.

Lynn said he also expected “a lot more bank failures” in the US in the near future, estimating failures in the “high 100s”, compared to the 132 banks that have been taken over or assisted by the Federal Deposit Insurance Corporation in 2009.

In mid-2010, Lynn argued, real estate value declines could be expected to “level-off”, with next year a good time for investors to “begin easing into the market. No-one can judge exactly the bottom, but this will be when people will be looking to get into [US real estate],” he said.

Tim Bellman, ING REIM’s head of global research and strategy based in London, added the US was one market where investors should be overweighted, as it was the only country globally expected to offer a “significant” premiums on real estate investments – over and above what traditional investors demand for the illiquidity of investing in property.

He stressed investors globally were increasingly looking for secure income, adding: “A lot of international investors like the US story of high income returns initially, but offering the prospect for growth later down the track.”

In Europe, he added valuations appeared to have found a floor, led by the dramatic repricing of assets in the UK, and London. He said this could be translated as a “countdown to recovery” for Europe, “based on current levels of liquidity and investor interest”.