Loan books kept on the sidelines

There is a comparison to be made between the anticlimax many are feeling towards the World Cup and that felt by private equity real estate firms who have been long-awaiting an explosion of real estate debt opportunities to transpire.

Markets are normalising. For someone who has a property which they have owned for years and which has clean leverage, they can and will be able to refinance. Bruce Flatt, chief executive officer of Brookfield Asset Management

Indeed, just as the soccer tournament in South Africa has not exploded into the event everyone expected, neither has a grand-scale relinquishing of sizeable real estate loan books taken place. When PERE held its European real estate forum in 2009, a majority of people spoke about the opportunities they expected to emanate from financial institutions. This week, during the 2010 PERE Forum: Europe, speakers accepted that the opportunity just wasn't emerging as anticipated.

Bruce Flatt, a keynote speaker at the Forum and chief executive officer of Brookfield Asset Management, wasted little time in telling the 300-delegate audience how the notion of trillions of dollars of loans on US properties coming due was a myth.

“Markets are normalising,” he said. “For someone who has a property which they have owned for years and which has clean leverage, they can and will be able to refinance.” He admitted the view at the end of 2008 “when the world stopped financing everything” looked very different. “Then I would have agreed with the myth but today it just isn’t true,” he said.

Of course, as would be expected of any congregation of senior market figures, anecdotes to the contrary were whispered on the conference’s sidelines – one notable example was a €2 billion book in Spain expected to be brought to market by Royal Bank of Scotland. On stage, though, there was a markedly different tone.

Forum Partners chief executive officer Russell Platt admitted: “We expected the governments to set up an RTC-type structure and that there would be an orderly process for optioning out assets, but that’s not happening.”

Citi Property Investor’s chief executive officer, Roger Orf, said the lack of prevailing debt opportunities in Europe had come as a result of nationalised lenders being shackled by governments. The amount of debt held by the UK’s main lenders, RBS and Lloyds Banking Group, is as much as £100 billion (€97 billion; $119 billion) he said, but he warned: “I think there is a conscious and deliberate policy on behalf of the government not to sell but try to allow assets to reflate.”

I don’t mean to insult bankers in the room but you know you either don’t have the balance sheet or the institutional temerity to take on real estate risk [right now]. Ric Lewis, chief executive officer of Tristan Capital Partners

Ric Lewis, chief executive officer of Tristan Capital Partners, believed the banks in Europe cannot take any further impairments on their balance sheets and resulting in no “disgorging” of assets in 2010 and “probably not in 2011” either. “We simply won’t have that market clearing exercise,” he stated.

And he added that banks won’t be lending in volume either any time soon. Calling “relationship banking” a myth, Lewis reiterated the words of other panellists when he said there was a general unwillingness to write large volumes of new loans. “I don’t mean to insult bankers in the room but you know you either don’t have the balance sheet or the institutional temerity to take on real estate risk [right now].”

RREEF’s managing director and global head of opportunistic investments, Chris Papachristophorou, explained the banks were “already pregnant” having already lent the bulk of their capital. “They don’t want to go through liquidations on their books so they will probably just change the terms of their loans and keep them out for the next three-to-five-to-seven years,” he said.

One lender at the event did counter such a suggestion by telling PERE that he was actually under pressure to lend (to the tune of €4 billion this year), however no such noise could be heard from the stage.