U.S. commercial property could be the cause for a new subprime crisis from 2010 onward, warned a research note published by Switzerland-based Investment24 Research.
How far reaching this crisis will be is hard to estimate, but its sure to affect European banks, the research said.
According to Moody’s Investors Service, current CPPI-Index, the prices of U.S. commercial property tumbled by 34.8% since 2007. This is attributed to the numerous insolvencies from 2009, which also raised vacancy rates.
“Of course, this puts a negative impact on rental income and book value of certain real estate,” said Bernd M. Otto, CEO of Investment24 Research. “Many debtors face serious problems because in some cases the home loan’s value is higher than the fair value of the real estate. If rental income does not even cover the interest rate of the home loan, it will be difficult to stop the downward spiral.”
He added that the banks, on the other hand, have partly packed these U.S. home loans into CMBS.
“This possibility to embellish financial statements draws an analogy to 2007’s sub-prime crisis,” Otto said. “If future development will continue in a similar manner, a new wave of write-downs would hit banks hard – not only in the U.S.”
He said that at the peak of the market, European banks co-financed various major projects. In addition, a lot of investors are invested via U.S. open property funds.
According to Kenneth Rosen, professor at the University in Berkeley, the whole extent of the commercial property crisis even threatens the entire financial system.
A new write-down wave would tighten the shortage of the credit offer for companies – with serious consequences for the global economic condition.