CRE: DUBAI ONLY THE TIP OF THE ICEBERG

Good FT article on CRE. Much like in residential housing (see US HOUSING: ECONOMIC MAGIC OR ILLUSION?) , banks are sweeping the problems under the carpet in the hope that time will bal them out. But the carpet hump just keeps  growing.

(…) The scale of lending across the world – with an estimated £3,000bn ($4,940bn, €3,300bn) of property debt outstanding in the US and Europe (…)

HSBC estimates that 85 per cent of UK loans made in the past five years are in breach of lending agreements. But banks are ignoring such problems. (…)

“Let me not pretend that it is not something that we are looking at closely. It represents a risk. We recognise that loans with LTVs of over 100 per cent will not be refinanced,” says Andrew Haldane, director for financial stability at the Bank of England. “The hope would be that new sources of finance will come to the market before the refinancing dates.”(…)

“Banks may overlook a breach of loan-to-values but they will take action if the interest is not paid. Loans then become impaired and banks will have to account for [them] in a different manner. ”(…)

About $1,600bn of commercial mortgage debt is estimated to mature in the next five years in the US and a further €366bn in Europe. This represents a massive equity call on the property sector.(…)

Those in the group estimate that £100bn could be needed to recapitalise the UK property sector, taking it to a sustainable LTV ratio, which means the industry could be in negative equity until 2017. (…)

Refinancing has not been more of a problem before because banks have been able to roll loans over, even when in breach. In fact, banks can make good money in bad times by boosting margins and fees. (…)

imageAnd yet, Goldman Sachs’ Financial Stress Index is at its lowest level since 1990. !!!

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