The majority of commercial property loans in the United Kingdom are currently in default, according to a study by CB Richard Ellis. Approximately £200 billion ($327 billion) is required to refinance existing loans secured against £450 billion of properties over the next five to seven years. Only half of that amount is available, according to a CBRE estimate.
“Almost every senior, and every junior, loan is in technical default,” according to Robin Hubbard, a director of CBRE’s real estate finance group. “There’s limited financing available for new loans or refinancing other people’s loans.”
Investors borrowed £360 billion to buy commercial properties in Britain, using just £90 billion of their own money. As a result, they now owe more than the properties are worth. Because of the global financial crisis, average property values have fallen 44 percent since the middle of 2007, notes Investment Property Databank Ltd. Banks are extending approximately £45 billion of loans maturing this year, though for a brief period only. This only postpones the ultimate defaults.
The major challenge is the leasing market, which “could be the straw that breaks the camel’s back,” Hubbard noted. “Nobody’s going to throw money in to get things back, unless it’s for new, nice, prime kit. There’s only so much magic dust you can sprinkle on the rubbish stuff.”
This is the initial phase of “additional guidance” the Treasury is considering to prevent what could be a commercial real estate crisis as more than $150 billion of loans bundled into CMBS come due between now and 2012. With financing still limited and as the values of commercial properties decline, some owners will find it tricky to refinance maturing debt.
Buffett, whose Berkshire Hathaway has $24.5 billion in cash, cut back on coverage of large commercial properties against catastrophes like hurricanes when the recession started and demand fell. The home insurance venture positions Omaha-based Berkshire Hathaway to benefit from the supply of foreclosed properties that has grown fourfold in three years. Because Buffett came through the subprime crisis in good shape, he has been able to increase his holdings in companies hurt by the recession in markets where demand is growing.