Brady Plan Needed for CMBS Challenges

AMSTERDAM-Given the substantial overhang of debt overhanging the real estate market, in particular CMBS, a Brady Plan equivalent for property could be an interesting solution, says Michiel Rang, head Europe and Asia, ING Commercial Banking. “If a way could be found with government backing to discount this debt to reflect long-term underlying property values and avoid potentially excessive impairment to market value, it could attract financially-driven investors back into the real estate market but on a more sound basis and with a better understanding of underlying risks,” he says in a guest column for Property Investor Europe 156. “It’s often that we find the solutions for tomorrow in the past. But that might be the case this time around if we don’t want to end-up in the real estate investment market of the 1980s, or even the 1970s.”

Rang says that with the market entering the third year of the global economic dislocation stemming from the credit crisis, there are clear signs we are at last entering a period of stabilization. “The general expectation is that we’re looking at a period of at least three to five years of slow to moderate economic growth that will be mirrored in the real estate sector, but is this really such a bad thing?” he asks. “Looking back at the peak of the market boom period in 2005 to 2007, it now seems to have been an aberration from the long-term trend – created by the availability of cheap money and the entry of new types of players into real estate.”

These new entries approached investments from the perspective of financial structures, rather than from a deep understanding of underlying bricks and mortar. This profound correction is probably good for the long-term health of the sector, he adds. The increasing cost of debt, along with tougher bank capital requirements, will mean greater equity components for deals, resulting in much more moderate pricing.