A recent increase in sales of commercial property loan securities in the US has led to some experts feeling cautiously optimistic. It is thought that the increase could have far reaching benefits, including strengthening bank balance-sheets, and adding to their ability to finance new property projects, including loans to revitalise derelict properties. There are also indications that the cost of lending is stabilising as lenders grow in confidence, which is a must for recovery.
However while the short-term goal of lending institutions seems to be to actively sell commercial property loans, the long-term goal is to fortify balance sheets in a "the house always wins" scenario. In the meantime strong demand for commercial property loans is helping lending institutions to maximise the price, as competitive bidding amongst buyers is creating a deep loan market place.
Lending institutions have been quick to capitalise on this, and are selling both performing and non-performing commercial property loans. By selling non-performing loans they are eliminating the high cost loan workouts and bank-owned properties, and by selling performing loans they are minimising risk on their balance sheets by improving diversification and by pursuing new lending opportunities – win/win.
After the collapse of the housing market, most lenders concentrated on disposing of acquisition, development and construction loans which presented the greatest losses. They have also actively sold loans collateralised by industrial and retail properties in order to minimise their losses.
Commercial property lenders in the United States have especially good reason to act now, as it is estimated that more than USD 1 trillion of commercial property loans will mature in 2015, and that more than half of those loans are in negative equity.
Commercial property loans are currently attracting various different investors who all have distinct investment objectives.
Distressed loans are proving attractive to private equity funds, hedge funds and opportunity funds that are prepared to take on additional risk. The buyers of distressed loans are often purchasing properties which are in danger of foreclosure, or which are in negative equity. Such purchases are seen as opportunities to buy commercial property for a very attractive price that can be repositioned to generate positive cash flow.
These buyers are perhaps the biggest benefit to the commercial property market, as they are injecting new capital and management into properties that have been in a state of limbo. Meanwhile performing loans are also seeing sustained demand from income oriented investors.
- Monday 30 May 2011