Banks will be the relative losers, left with lower-quality real estate assets, while the quoted property sector will be a relative winner in the property debt crisis, said Morgan Stanley.
According to new research from the investment bank, commercial real estate faces a €400bn-700bn financing gap, mainly from bank deleveraging.
“Banks are set to reduce their exposure by €300bn-€600bn, or 12-25%, we estimate. Of this, up to €150bn is cross-border. Capital values will fall by an average 10% in the next three to five years, and commercial mortgage-backed securities run-off and open-ended fund liquidations could create a further €100bn outflow,” said Morgan Stanley.
In general, the quoted property sector is well capitalised, well funded and invested in good-quality assets. Quoted companies should come through well in the long term, in particular those companies with limited exposure to Benelux, CEE, and southern Europe, and to secondary-quality assets, which Morgan Stanley thinks will be hit the hardest.
Alternative funding providers will be ‘niche players’ and will cherry pick assets, offsetting the funding gap by only €100bn-200bn, Morgan Stanley estimates, leaving a €300bn-500bn multi-year gap. Liquidity provided by central banks avoids dislocations, but does not solve the problem.
Changes in capital and funding rules are depressing returns and values of CRE loans. Banks will likely be left with a backlog of long-dated loans, which will be a drag on profitability and may still require value adjustments.
Banks with larger CRE loanbooks, exposure to lower-quality borrowers or higher-risk sovereigns, and higher funding costs, are more at risk, said the bank.
“We are concerned about smaller banks in southern Europe, ‘restructuring stories’ that still have large CRE loans, and a weakening Benelux real estate market,” said Morgan Stanley.