The mountain of European real estate debt set to mature over the next three years will lead to more forced sales but asset protection schemes already in place in many countries will ensure a gradual release of poorer-quality assets to the market and orderly workouts, according to CB Richard Ellis' European Commercial Real Estate Debt ViewPoint released at Mipim on Wednesday. According to CBRE, some EUR 970 bn of European commercial real estate debt was outstanding at the end of 2009. Germany and the UK account for over half of this figure, at 24% and 34% respectively, mirroring their typical share of European commercial real estate investment activity.

The mountain of European real estate debt set to mature over the next three years will lead to more forced sales but asset protection schemes already in place in many countries will ensure a gradual release of poorer-quality assets to the market and orderly workouts, according to CB Richard Ellis' European Commercial Real Estate Debt ViewPoint released at Mipim on Wednesday. According to CBRE, some EUR 970 bn of European commercial real estate debt was outstanding at the end of 2009. Germany and the UK account for over half of this figure, at 24% and 34% respectively, mirroring their typical share of European commercial real estate investment activity.

Although a large legacy to manage, not all of the EUR 970 bn is bad debt and by far the greatest problem for banks is the EUR 207 bn pool of loans secured at high LTVs on poor quality real estate.

Iryna Pylypchuk, Associate Director of EMEA Research, said: 'Rising values are less likely to rescue loans secured against secondary properties and the majority of this pool will struggle to see significant capital value appreciation in the near or even medium term. In contrast, the large amount of outstanding debt originated at high LTVs against better quality properties, while still at risk, is more likely to be re-floated over time and will only require relatively passive asset management to bring the original equity back into the money.'

The UK and Germany are more exposed, both in absolute and relative terms, to potential 'problematic' loans than other countries. 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. Commenting on the reasons behind the disparities between nations, Natale Giostra, Head of UK & EMEA Debt Advisory CBRE Real Estate Finance, said: '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. 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.'

With almost half of the total outstanding European debt due to mature over the three years to the end of 2012, averaging EUR 155 bn per annum, this will lead to more forced sales, CBRE predicts. However, with asset protection schemes in place in Ireland, the UK and potentially in Germany, these are phasing the release of poorer quality assets into the market which are being held for a long-term orderly workout. As a result fire sales of secondary assets are not expected to flood the market.

Robin Hubbard, Executive Director of CBRE Real Estate Finance, commented: '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. 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 ten years.'