EUROPE - Germany and the UK are more exposed to more than the €200bn pool of real estate loans identified by CB Richard Ellis as "problematic" than any other markets in Europe.

It is estimated that there was €970bn of European commercial real estate debt outstanding at the end of 2009, but less than a quarter of this can be described as "bad debt", according to CBRE.

The greatest problem for banks is the €207m pool of loans secured at high loan-to-value (LTV) ratios on poor-quality property assets, which both Germany and the UK are most exposed in both absolute and relative terms, according to CBRE's latest European Commercial Real Estate Debt ViewPoint.

Germany and the UK account for over half of the €970bn total, with 24% and 34% respectively, mirroring their typical share of European commercial real estate investment activity.

Furthermore, Germany and the UK have a high concentration of debt secured on poor quality property at around 30% of the total outstanding, compared with only 12% in the rest of Europe.

CBRE said this level of exposure is a reflection of the trends in the underlying real estate investment markets in the earlier part of the decade.

"Germany and the UK saw some of the highest levels of gearing at the top of the market in 2006-07 and so are likely to have a higher proportion of problem debt arising from highly-geared loans," said Natale Giostra, head of UK and EMEA debt advisory at CBRE Real Estate Finance.

"Germany was particularly affected as the investment market doubled in size over the peak period, with many highly-leveraged opportunistic investors accessing the market through purchase of large CRE portfolios of mainly secondary properties in secondary locations.

"In contrast, France had a more balanced investor profile with local property companies typically using more moderate levels of gearing than their counterparts in other countries."

CBRE predicts there will be more forced sales between now and the end of 2012, as almost half of the total outstanding European debt is due to mature in that time.
But with asset protection schemes already established in Ireland, UK and potentially in Germany, the firm does not expect fire sales of secondary asset to flood the market.

"While the scale of the problem may be large, with the help of government backing, equity issuance, and rapidly rising profitability, lenders are generally taking a methodical approach to recouping value, albeit different countries are adopting individual approaches," said Robin Hubbard, executive director at CBRE Real Estate Finance.

"This primarily involves leveraging of their relationships with asset managers and capital providers.  Banks will therefore continue to control the process and the flow of assets onto the market, in what is likely to be a long-term solution deployed over the next 10 years.

"Unfortunately, there will remain a residual pool of tertiary quality property that will probably never recover materially in value and for which the best solution for the lender is simply to foreclose and recycle whatever proceeds arise back into their business," he added.

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