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CRE Finance World, Winter 2014

Regulatory Impacts Looking forward there are an increasing number of regulatory reforms being put in place as a response to the global financial crisis. Given the scale of deleveraging required across Europe we focus on the impacts across Europe, and in particular the impact of the European Banking Authority (EBA) rules. Here the EBA is requiring banks under its watch to maintain a Core Tier 1 ratio of 9%. We assess the impact based on analysis undertaken by the International Monetary Fund (IMF) of the EBA rules. In their analysis in 2012 the IMF estimated that banks need to shrink their aggregate loan books by 7.3%ii. However, in our view there are valid arguments for the future CRE deleveraging to be higher or lower than this 7.3%. Real estate could see a bigger hit as individual loans tend to be higher in value than in other industry sectors. Therefore it could be easier to sell these higher valued CRE loans. Property too, is not high on the political agenda with many state-owned or state controlled banks now more focused on lending to SMEs to create jobs, rather than to tax efficient special purpose vehicles (SPVs) funding commercial real estate. On the other hand, banks may also profit from additional business to these SPVs. Therefore it may not be of interest to shrink lending to the CRE sector. Also, the complexity of CRE lending including additional swaps and hedging may make such loan sales much more complex than loan sales in other industry sectors. On balance we feel that a 7.3% hit to the collective CRE loan book to be appropriate. Whilst the refinancing gap is ultimately the additional equity a borrower needs to find. The regulatory impact is the reduction in equity that hits the bank directly and could come through additional repayment of loans, equity raising or writedowns. Given that some banks have already made some headway in shrinking their balance sheets we have assessed the level of deleveraging undertaken in the main European markets since the beginning of 2012. But even with that taken into account, we still see a significant impact overall, with regulation adding a further USD65bn in required deleveraging, or close to 90% of the refinancing gap (Exhibit 3). Of course this analysis ignores some of the more local regulatory impacts, such as slotting in the UK. Given the variations and lack of transparency it is not possible to fully model these impacts on the market. CRE Finance World Winter 2014 62 Markets with large absolute funding gaps such as the UK, Spain and Ireland see no regulatory impact given the scale of deleveraging already seen in these markets. In contrast, other core markets do see some impact. France now stands out with a gross gap of close to USD24bn. With no evidence of any clear deleveraging in the French market since the outset of the financial crisis, we believe much action remains needed there. In both Germany and the Netherlands we also see significant regulatory impacts, although in both these markets we have seen some evidence of modest deleveraging. Exhibit 3 European Gross Debt Funding Gap Source: DTZ Research Bridging the Gap Delays in bank deleveraging are partially hampering the recovery in the market. Improved market sentiment and capital value growth will go some way to resolving the gap. Banks also need to deleverage further through crystallising losses on non-performing loans. This is being hampered by swap positions associated with these loans which have impacted both private investors as well as more seasoned property companies and funds. These costs can be significant and up to 15% of the maturing loan valueiii. In the UK separate research has estimated that borrowers could claim up to GBP10bn through the mis-selling of swapsiv. Europe Progresses in Debt Workout


CRE Finance World, Winter 2014
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