The commercial real estate (CRE) financing industry is fundamentally unprofitable. That is the grim conclusion of a confidential report obtained by PropertyEU. It gets worse: even in the 'golden years' of 2006-07, the industry as a whole does not return its cost of capital, let alone over the business cycle. 'Put another way, the "profits" recorded in good times are in fact economic losses to equity holders; worse, they fail to provide a cushion for the significant losses that come in industry downturns.'
The commercial real estate (CRE) financing industry is fundamentally unprofitable. That is the grim conclusion of a confidential report obtained by PropertyEU. It gets worse: even in the 'golden years' of 2006-07, the industry as a whole does not return its cost of capital, let alone over the business cycle. 'Put another way, the "profits" recorded in good times are in fact economic losses to equity holders; worse, they fail to provide a cushion for the significant losses that come in industry downturns.'
Entitled 'Commercial Real Estate Lending: Finding economic profit in a difficult industry,' the report is a damning indictment of bankers who were only interested in boosting market share, without any consideration for returns or profit and unhindered by any knowledge of their products or markets. The inevitable recommendation is: banks should focus on markets and segments that they know well.
The survey is the second in a series focused exclusively on commercial real estate. The findings are based on responses from eight large, primarily European banks and supplementary interviews with other players. Collectively the two groups comprise about 40% of CRE loans outstanding on balance sheets across Europe, McKinsey claims. The survey spanned 2006 and 2007, the final two years of the property boom.
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