Tuesday, February 05, 2008

Risk of property defaults growing

The Financial Times
By Daniel Pimlott in New York and Gillian Tett in London

Published: February 5 2008 18:47 | Last updated: February 5 2008 18:47

There is a growing risk of defaults on loans on commercial property this year, in a trend that could spill over into tumbling values and create more jitters in the credit world, analysts and bankers warn.

US property companies that took out big short-term loans to finance acquisitions in the past couple of years at low-interest rates are now struggling to refinance this debt, as banks curb lending and commercial property prices fall.

Squeeze halts sales in office property - Jan-25Insight: An international approach to commercial real estate - Jan-16Banks gloomy on commercial property debt - Jan-14Punitive barriers ‘threatening progress’ - Jan-11Singapore’s GIC builds stake in British Land - Jan-10Savills defies gloom with upbeat outlook - Jan-09In recent days, Harry Macklowe, the New York developer, has failed to refinance $5.8bn in short-term loans he used to buy seven Manhattan office towers from Equity Office Properties last February. Deutsche Bank, which provided the loan, has taken control of the buildings and will put them up for sale, a person familiar with the matter said.

Analysts warn of a pattern that could spread. US commercial property prices have fallen 10 per cent in some markets since August, after rising more than 90 per cent since 2001, according to Real Capital Analytics.

“For [recent] loans coming to maturity this year . . . it will be very difficult to acquire refinancing,” said Sam Chandan, chief economist at Reis, a property re-search company.

Signs of growing stress also exist in the UK commercial property sector. Tomorrow, UK group British Land is expected to announce a sharp writedown in the value of its commercial property. The Bank of England highlighted its unease in its recent quarterly bulletin, noting that “commercial property prices fell sharply” in recent months, and “returns on commercial property slowed significantly”.

Most analysts think the scale of problems building in the commercial property sector are far smaller than in the subprime loans market. However, if the sector produces tangible losses this year, this will be deeply unwelcome for banks and investors in commercial mortgage-backed securities

One area of concern revolves around property companies that have taken out floating rate loans in the past couple of years.

This year $22bn out of a total $38bn in outstanding floating rate CMBS is coming due, according to Wachovia Capital Markets data, of which $2bn faces the greatest risk of default because it has a final maturity this year with no option to extend.

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