UK real estate needs up to £250bn to recapitalise

CB Richard Ellis estimates the UK market is at least £150bn short of the equity necessary to return to equilibrium.

The UK real estate sector requires between £150 billion ($245 billion; €165 billion) to recapitalise itself in the medium term, according to estimates by experts from the real estate finance team at Richard Ellis.

In a presentation held at the property services firm’s City of London office this morning, executive directors Philip Cropper and Robin Hubbard told journalists that this estimated amount of capital would be needed to ensure banks would feel comfortable to lend again at a loan to value level of 60 percent.

“If you were to refinance everything just to get the banks where they would be comfortable to lend, that is how much money they would need,” said Hubbard.

But, he added there was only between £70 billion and £140 billion of equity capital currently looking to be deployed into UK real estate over the coming five years.These sources include unlisted funds (between £15 billion and £25 billion), hedge and private equity funds (£5 billion to £10 billion), sovereign wealth funds (£10 billion to £30 billion), direct institutional funding (£30 billion to £60 billion), and REITs (£5 billion to £10 billion).

Even on an optimum basis that would be insufficient to meet the minimum amount needed to meet banks at their current risk levels.

CBRE also said that the demand from those parties seeking to deploy capital into real estate currently only focuses on prime assets such as central London offices let on strong covenants to reputable tenants, an asset class that offers slim pickings, particularly for the likes of opportunity investment vehicles who are promising their investors with IRRs of 20 percent or more.

CBRE said prime assets do not generate sufficient IRRs for a lot of “new equity” but that same “new equity” does not want, nor can it finance, non-prime assets.

CBRE pointed out that rental levels are not rising so it would be unlikely that capital values would increase any time soon and in terms of secondary real estate, many occupiers would not be able to renew their leases upon expiry as the wider economy continues to effect many businesses negatively.

“Maybe it’s the last thing [struggling occupiers] would stop paying because they need their premises to operate from, but at some stage they will have to leave.”  The resultant “flood” of non-prime assets onto the market will cause values to come down.