View ahead is crystal clear: debt is the problem – and opportunity

The start of a new year is traditionally a time for crystal-balling the year ahead. Real Estate Capital and Barclays got together with four of the UK’s leading CEOs – David Atkins, Chris Grigg, Nick Leslau and Jamie Ritblat – to discuss what they think the big issues will be in 2012.

From what they and others are saying, things are still extremely tough. First, there will be less, not more bank debt available for property, and that debt is getting more expensive. The euro crisis is accelerating continental European banks’ pull-back to their home markets and funding costs have risen. To stretch their lending capacity, banks are looking for non-bank partners to work with. Others – insurance companies, maybe even private equity funds – will step in to provide debt, but it will take time.

Second, less than prime property in the UK will see some serious repricing. The gap between what the holders want and buyers are prepared to offer is too big – 20% too big in some cases. The question is whether the owners can hold out much longer, and this in turn depends on what the banks will do with their loans.

Third, retailing is in for a lot of turbulence. There’s less spend and shopping patterns are changing fast; one scary statis-tic from the Investment Property Forum/Society of Property Researchers seminar this month indicated that internet sales would shrink store sales by 20%, requiring 21% less space and 30% fewer stores.

Fourth, the letting market is very quiet and expected to stay that way for at least the first half. It was disappointing but not surprising to hear that law firm CMS Cameron McKenna pulled out of a Hammerson City prelet. And finally, there will be great opportunities, many revolving around debt.

For investors in credit, it would be a great step forward if 2012 were the year when banks and borrowers could come up with structures for real estate that European pension funds and insurance groups liked. This is not just about returns. Investors would like seven-year-plus credits, which won’t prepay. This might mean adopting ideas from the US, where debt is commonly stapled to the properties so that borrowers can sell if they wish.

The flow of distressed debt portfolios coming out of European banks may have only just started – or so plenty of investors believe. So far, the big US opportunity funds like Blackstone, Cerberus and Lone Star have had the field to themselves.

But the band of investors with their sights set on this opportunity is growing fast. Forum Partners is one of a select group of investment managers that have shown they can take advantage of the market’s distress, find deals and, crucially, have a loan servicing platform.

Managers of other large pools of capital for property, such as the Townsend Group and the multi-managers, will also be looking for ways to invest and the right partners in 2012.