This week, we published on recapitalnews.com a Deep Dive, in collaboration with sister title PERE, on how special servicers are dealing with troubled real estate loans. It can be read in full here. The focus of the piece was the US, where many securitised loans have been transferred to special servicing due to the impact of the pandemic. However, servicers in Europe also told us they are braced to take on workout mandates in 2021.
So far, lender and government relief has helped stave off widespread distress on both sides of the Atlantic. In the US, an unprecedented wave of loans entered special servicing. But borrowers have been granted temporary forbearances of more than $31.2 billion across 800 loans, commercial mortgage-backed securities data provider Trepp estimates.
The US CMBS delinquency rate declined from 9.6 percent in July to 8.17 percent in November, according to Trepp. But that masks the true extent of potential distress, with special servicers in the US telling us they have done a lot of workouts on loans that have not actually defaulted.
In Europe, the situation is even more difficult to read. Only a fraction of European real estate debt is held in CMBS structures, meaning there is little public data on its performance. Those loans that have been securitised in recent years have tended to be low leverage loans to blue chip sponsors. To date, little has been placed into special servicing.
The servicers we spoke to in Europe confirmed that lenders have granted forbearance to borrowers across the market. That has ranged from modifications to loan terms, such as granting sponsors permission to make lease amendments, to financial covenant waivers and some interest and principal deferrals. Few enforcements have been reported, and those that have happened are understood to be limited to retail assets with problems pre-dating covid-19.
As is the case in the US, such forbearance masks the true scale of the issue across Europe’s real estate debt pile. In both the US and Europe, many forbearance agreements are due to expire by the end of this year, or in early 2021, and servicers believe lenders will not be willing to extend relief beyond the first quarter of 2021.
The recent news that covid-19 vaccines are on their way will lead many real estate owners to hope that better market conditions are coming, meaning income will improve and debt will be easier to service. The very fact that lenders have, so far, taken a lenient approach with their borrowers also hints that they will be keen to work collaboratively to resolve problem situations.
However, once lenders call time on forbearance, we will better understand the scale of the problem covid-19 has caused across Europe’s real estate debt market. Many are hopeful the conservative underwriting and limited use of leverage during the past decade will stand the market in good stead. But next year is bound to bring more defaults, enforcement action, borrowers handing over keys to assets and, as a natural consequence, distressed investment opportunities.