EUROPE - The commercial real estate lending market is sluggish, and the possibility of institutional investors such as insurance companies and pension funds providing new sources of finance is unlikely.
According to Legal & General Investment Management (LGIM), the commercial lending market has deteriorated drastically since the 2008 financial crisis, leading to a high concentration with a small number of banks providing debt packages for most of the current deals.
UK banks are among the institutions that have reduced their lending activity as part of their plans to decrease their exposure to the commercial real estate market, LGIM said.
While some market specialists believe the void left by the banks will be filled by a new type of lender, Ashley Goldblatt, head of commercial lending at LGIM, said there were still many barriers for institutional investors.
"Lending volumes are now back to where they were more than 10 years ago despite the fact the risk and reward balance is heavily skewed toward lenders," he said.
"It is, therefore, unsurprising there has been significant discussion about a new breed of lending emerging to fill the void left by banks.
"Unfortunately, we do not believe new sources of finance will suddenly become available, as the combination of expertise, experience and governance required to conduct this type of activity is not easily replicated."
Goldblatt added that both insurance companies and pension funds were increasingly outsourcing asset management work and that such managers were usually not set up to conduct banking type activity.
As for mortgage REITs and mezzanine debt funds, Goldblatt said these vehicles were not necessarily the answer to the problem, as they are currently struggling to put their capital into a deal due to a lack of opportunities.
Goldblatt conceded: "Ultimately, that means borrowers will have to adjust to a dramatically different lending environment, where finance availability is far lower and, consequently, the cost of commercial real estate loans much higher than that which existed before the financial crisis."