Debt is the new equity and everyone wants a piece of the action. In the 12 months since the credit crisis gripped the global property markets, the number of dedicated private equity real estate vehicles targeting debt has jumped from just a handful to an estimated 80 in the US alone, according to one market participant.
However, in the industry’s rush to capitalise on the distress of others, questions are being raised as to whether the size of the opportunity will be as great as most hope.
Yes, there is an estimated $1.2 trillion of outstanding commercial real estate debt set to mature in the US alone between now and 2012. Quite a number of those borrowers are already delinquent on their repayments and face little prospect of paying off the loan when the debt becomes due.
But pending maturities and defaults don’t directly translate into discounted buying opportunities.
In the US, “extend and pretend” has become part of the industry’s daily vocabulary. In the height of the crisis, banks faced with borrowers struggling to refinance their maturing debt were eager to extend loan terms in an effort to avoid foreclosure.
That “extend” sentiment has apparently increased over the past few months, though. Banks have built a comfortable capital cushion after successfully raising equity in the public markets and the pressure they once felt to deal with their “toxic” real estate assets has lessened. Now as the economy starts to show signs of green shoots, there is a slowly growing confidence that real estate values may rebound in the not-too-distant future. And why lock in a write-down today, when tomorrow may bring higher values?
Borrowers have the same mentality. Many are happy to extend their maturities if it means there’s a chance of protecting their assets.
Even in the CMBS market, extend and pretend has come to the fore. Just last week, the US tax authority, the Internal Revenue Service (IRS), introduced new rules that will make it easier for distressed real estate owners to talk to special servicers about modifying CMBS loans not in imminent danger of default.
Extend and pretend? Delay and pray? Absolutely. And without decisive action to deal with problematic loans, the commercial real estate industry faces the possibility of a slow, prolonged recovery. The dollar-amount of the distressed debt opportunity is certainly larger than that seen during the RTC days, but only time will tell if the opportunity is as golden.