Improvements in European CRE market sentiment in the 2H09 has been dramatic but can’t be sustained given the dynamic unfolding in the CMBS market, Henderson Global Investors analysts said.
The Investment Property Databank (IPD) recently announced that its U.K. Quarterly Property Index recorded capital growth of 8.1% in 4Q09, its largest ever result. This was followed by a further 1% of capital growth in January 2010.
Henderson analysts attributed the growth to the more liquid prime segment, while the broader market has remained under pressure.
“LTVs, particularly on those deals originated at the peak, still remain high following the sharp decline in valuations since mid-2007, raising refinancing risk,” analysts said.
CRE usually lags the broader economic recovery, benefiting when employment growth comes through. This is yet to be seen, as unemployment rose further in the Eurozone, albeit at a slower rate, to 10% in December 2009 from 9.9% in the prior quarter.
“Some predict further institutional flows into CRE, but the widening of government bond yields has reduced the relative attractiveness of the asset class,” Henderson analysts said. “ A boost in new issuance looks unlikely given the fragile economic recovery in Europe. The banks are also facing a wall of refinancing in the coming years, many with very high LTVs, which may bring forced selling, higher defaults, repossessions and further valuation pressures. It is therefore unlikely that the CMBS market will fully recover without additional liquidity and an improved attitude by the banks to refinance outstanding CRE loans.”