Hot on the heels of its review of US banks’ exposure to commercial real estate, ratings agency Fitch has also announced that it will be looking into the European market.
So far, so predictable. But, check out the second, rather scary, line of Fitch’s press release:
Fitch Ratings-London-18 August 2009: Fitch Ratings is undertaking a detailed review of European banks’ exposure to the troubled commercial real estate market. Asset values across the sector have fallen sharply (by up to 50% to 60% in some sectors) yet this has not so far resulted in serious losses at most banks. Fitch’s review will incorporate an updated assessment of the quality of exposures and risk mitigants in the most active European commercial property lenders, and aims to determine the extent to which this sector represents a significant source of potential future problems for Europe’s banks.
And here’s a bit more detail on that bank losses point — using Britain’s abysmal CRE sector as a reference point:
Fitch has recently downgraded a number of UK commercial mortgage-backed securities (CMBS) ratings to reflect growing concerns about balloon risk, or risk of the loan not being repaid at maturity, in particular, after strong declines in UK commercial property values. (see ‘UK CMBS Performance: Summary of Reviews and Rating Actions’ published on 29 June 2009 at www.fitchratings.com). Despite falls of about 50% in UK capital values over the past 18 months, bank loan losses from forced asset sales have been limited as interest cover has remained healthy. However, Fitch expects a combination of weakening rental income and gearing/loan-to-value related covenant breaches to result in increasing foreclosures, with the resultant impact on investment property values across the wider market and bank loan losses overall.
Ouch.
Related links:
CMBStress - FT Alphaville
“Losses on UK commercial real estate could equal subprime” – FT Alphaville
Commercial real estate shoe – The Long Room
CDOs, a tendency to liquidate – FT Alphaville