The debt burden facing the commercial real estate industry since the beginning of the crisis five years ago is very much alive. None of the major Western real estate markets have been able to restore normal access to capital. In a strategy paper we wrote three years ago, entitled “The Big Payback”, we suggested that in the case of real estate debt the deleveraging process would be easier before it would be difficult. In a cycle similar to weight loss, the pace of reduction achieved at the start may plateau and prove increasingly difficult to shift. With finance available on high quality assets in most markets there is a common perception that things are ‘sorting themselves out’. And recent data shows that banks have made demonstrable progress in reducing their debt exposures.
An accompanying belief is that greater debt availability will eventually creep into higher risk product as has been the case for equity. We remain suspicious of such expectations, particularly in markets which are still largely reliant on bank debt. Increasing evidence of alternative sources of capital is regularly touted by market participants as a very encouraging sign. And while this is certainly the case, a significant portion of this capital is highly selective and, as yet, slow to progress to market.
Source : UBS AG