CBRE REAL ESTATE FINANCE BULLETIN Issue 78 - 08 December 2009
WEEKLY MARKET SENTIMENT BAROMETER MONEY MARKET RATES
V RATE Current Last Week 52 Wk High 52 Wk Low
UK Base 0.50% 0.50% 2.00% 0.50%
IPD 1 Year (2009) 1
UK EPRA 1 3M LIBOR 0.61% 0.61% 3.28% 0.54%
Euro Base 1.00% 1.00% 2.50% 1.00%
REAL ESTATE SECURITY PRICING 3M Euribor 0.72% 0.72% 3.43% 0.71%
RATE Current Last Week 52 Wk Low 5 Yr £ Swap 3.12% 3.03% 3.87% 2.79%
EPRA UK Index 755.6 749.6 828.9 386.9 7 Yr £ Swap 3.49% 3.41% 4.14% 3.16%
1602.6 1572.9 1665.2 905.9 10 Yr £ Swap 3.81% 3.73% 4.37% 3.40%
5 Yr € Swap 2.73% 2.67% 3.60% 2.58%
DERIVATIVE PRICING: IMPLIED TOTAL RETURN 7 Yr € Swap 3.11% 3.05% 3.77% 2.91%
RATE Current Last Week 52 Wk Low 10 Yr € Swap 3.48% 3.42% 4.04% 3.22%
2009 0.25% -0.50% 0.30% -21.00% 5 Yr Gilt 2.58% 2.58% 5.48% 2.14%
2010 9.85% 9.85% 11.00% -4.75% 10 Yr Gilt 3.70% 3.55% 5.26% 2.97%
2011 7.20% 7.75% 12.00% 6.50% 20 Yr Gilt 4.26% 4.14% 5.14% 3.76%
2012 7.20% 6.80% 11.80% 6.50% INFLATION SWAPS 5
2013 7.20% 7.00% 11.60% 7.00% RATE Current Last Week 52 Wk High 52 Wk Low
2014 7.20% 7.00% 12.50% 7.00% UK RPI 10 Year 3.46% 3.42% 3.73% 1.89%
UK RPI 20 Year 3.76% 3.72% 4.08% 2.58%
Other product prices including residential and sub-sectors available on request
REAL ESTATE LENDING
• End of year MPC meeting is due to take place this Thursday 10th December.
• The MPC's decision on QE will determine the movement in period rates over the next month.
• A further increase in QE will sustain the current downward trend in £ money market rates, whilst putting the programme on hold will start a slow upward move in pricing.
• 5 year all in funding costs currently (over 3.12% £ SWAP) 5.37%
• 20 year all in funding costs currently (over 4.26% £ GILT) 6.26%
Typical Deal Terms
Short Unexpired Lease Term (to 10 yrs) Investment Parameters Long Unexpired Lease Term (10 yrs+) Investment Parameters
LTV Up to 70% LTV Up to 70%
Loan Term 2 - 5 years Loan Term 3 - 20 years
Margin ( > SWAP) 1.75% - 2.50% Margin ( > SWAP/GILT) 1.75% - 2.50%
Arrangement Fee 1.00% Arrangement Fee 1.00%
1) Worsening refers to reducing Impied Total Return from derivative pricing and decreasing EPRA UK Index
2) Source: FT & Bloomberg
3) Source: CB Richard Ellis - GFI
4) Source: FT & Bloomberg
5) Source: Bloomberg
CBRE REAL ESTATE FINANCE BULLETIN Issue 78 - 08 December 2009
DEBT MARKET NEWS
£30bn of Real Estate in Default
The value of UK commercial real estate debt in default or in breach of key lending agreements more than doubled to about £30bn in the first six months of the year, adding
pressure on the banking sector, a survey has revealed. Banks have also extended or refinanced an extra £16bn in the first-half of the year, rolling over maturing debt that could not
be paid back by cash-strapped borrowers or restructuring loans when breaches were threatened owing to the steep fall in values. This strategy has been dubbed “extend and
pretend”, with some banks even refusing to test loan covenants, given a reluctance to crystallise losses by selling the property asset or the debt attached to it. De Montfort University,
which compiles the most comprehensive study of the sector, will on Friday say that banks are beginning to deal with the massive £224bn of outstanding debt to the real estate
sector. There was £18.6bn reported in breach of covenants and £11.8bn in default reported in the first six months of 2009, the equivalent of all the commercial property in
Portugal. Bill Maxted, author of the report, said: “The first half of 2009 has seen the UK commercial property lending market begin to experience the impact of the global financial
crisis that started rumbling during 2007 and reached a crescendo in the autumn of 2008.” The value of outstanding debt secured by UK commercial property was reported at
£224.1bn at the end of the first-half, down from the record £225.5bn recorded at the end of 2008, underlining just how indebted the UK sector is to the banks. The survey shows a
tough refinancing schedule for property investors, with £43bn of loans due to mature this year and £32bn due for repayment in each of the next two years, although much of this is
expected to be rolled over.
Mr Maxted said: "This paints a picture of a lending market that has almost ground to a halt and the future activity of which is totally constrained by a debt burden of approximately
£106bn that is due for repayment by the end of 2011." The "log jam" created by this overhang of maturing debt impossible to refinance in the current market will leave a legacy that
may take years to work through, he said.
The good news for the banking sector is that fees and margins are at record levels.
Source: Financial Times, 4th December 2009
STRUCTURED FINANCE NEWS
A Recovery May Not Come in Time to Absorb the Wave of Bullets Falling
Credit rating agencies have raised fears that billions of dollars worth of bonds secured against commercial property in the boom years could default because of the crash in real
estate values. Some $3,500bn (€2,355bn, £2,125bn) of commercial property debt is outstanding in the US alone. Of that, about one-quarter was securitised, where groups of
loans are packaged and sold to investors in tranches offering different levels of risk and profit. Moody's has warned that commercial mortgage-backed securities (CMBS) issued
during the boom are set to incur significant default rates, given an average fall in values of 43 per cent since the peak in the US. The holders of certain riskier bonds are already
expected to have had their investments wiped out. Troubles will grow as maturities approach on bonds issued at the peak of the market, according to Moody's. It is estimated that
up to $153bn of CMBS will come to maturity by the end of 2012 and $100bn will face refinancing difficulties. The US government has already been forced in effect to underwrite
the CMBS market.
Fitch, another rating agency, has warned of similar pressures in Europe, where CMBS worth as much as €66bn ($98bn, £59bn) are due for maturity before 2014. About 40 per
cent of the instruments issued between 2004 and 2008 were in the UK or Germany. Fitch predicts a bottleneck in Germany, with €13.5bn of loans due in 2013, twice the UK's
predicted peak of €6.6bn in 2012. A property recovery may yield only limited benefits. "It is questionable whether a recovery will be in time and in sufficient magnitude to absorb
the wave of bullets falling from 2011 onwards," says Euan Gatfield, analyst at Fitch. Although CMBS can be extended, securitisation rules are not simple and most of the products
have a legally finite life. "We have never been at this point before. We don't know how litigious it might get," says Ian Marcus of Credit Suisse. "It all comes down to who bought the
bonds. In Europe, it was primarily hedge funds and special investment vehicles, rather than a stable base of institutions as in the US." The UK and the US have better restructuring
processes than other European markets, and work has already begun on some problem loans. Most notably, the White Tower loan that backed a portfolio of London offices once
valued at £1.8bn is swiftly heading for disposal.
Source: Financial Times, 7th December 2009
DERIVATIVES MARKET NEWS
• CBRE November index figures came in stronger with UK All Property returns at 3.4% (vs 2.7% in October) and 0.1% in the year to date.
• All Property Capital values rose by 2.7% in November, surpassing October as the strongest month in the history of the index (+2% in October).
• All Property rental values showed -0.3% in November (vs -0.4% in October)
• Rental growth showed -8.5% in the year to date.
• All Property equivalent yield fell 21bp, ending the month at 7.6%.
The highest compression was seen in All Shopping Centres and All Retail Warehouses – equivalent yield fell by 40 bps ending at 7.8% and 7.4% respectively. Central London
Offices yield compressed by 20bps to end at 6.1%. The IPD Property Derivative curve saw continued strength in the front-end of the curve, with a stable outlook post 2010.
Contracts for 2009 gained by 1% during November, closing the month with a 0.25% total return. Having been as low as -21% earlier this year, this is the first month that the 2009s
closed a month in positive total return territory. The 2010s lost 30bps over the course of the month, implying a 9.85% total return for the year, or the first year of capital gains since
2006. Post 2010 the markets have been marginally re-priced, with the 2011-2014 period pricing in total returns of 7.2% at the start of the month, gaining 50bps per year to close
Source: CBRE/GFI, 8th December 2009
Corporate & Structured Loan & Corporate
Loan Servicing Indirect & Derivatives EMEA Debt Advisory
Mark Evans John Smith Mark Creamer Paul Robinson Paul Ross-Gower
t: 020 7182 2870 t: 020 7182 2255 t: 020 7182 3010 t: 020 7182 2740 t: 020 7182 2931
e: email@example.com e: firstname.lastname@example.org e: email@example.com e: firstname.lastname@example.org e: email@example.com
Paul Lewis Steve Ambridge Will Ridley Michel Heller Giles Tickle
t: 020 7182 2871 t: 020 7182 2896 t: 020 7182 2930 t: 020 7182 2329 t: 020 7182 2918
e: firstname.lastname@example.org e: email@example.com e: firstname.lastname@example.org e: email@example.com e: firstname.lastname@example.org
CB Richard Ellis Real Estate Finance, Kingsley House, 1A Wimpole Street, London, W1G 0RE
Important Information: Information herein has been obtained from sources believed to be reliable. Whilst we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. Any projections, opinions, assumptions or estimations used are for example only and do
not represent the current or future performance of the market. The rate for Deal Terms are presented for general illustrative purposes only. CB Richard Ellis Real Estate Finance Limited is an appointed representative of CB Richard Ellis Indirect Investment Services Limited which is authorised and regulated by the
Financial Services Authority for investment advice. This information is designed exclusively for your personal use and cannot be reproduced without prior written permission from us.