FRANKFURT, GERMANY-European banks' suspension of disbelief in non-performing commercial real estate loans is nearing an end and many investors will default as these mature, starting this year, so that a wave of selling will occur, predicts Ruprecht Hellauer, managing director of Frankfurt workout firm Lohnbach Partners.

In a new study, Hellauer said Samuel Taylor Coleridge coined the term “suspension of disbelief” to describe non-realistic or fantastic storylines, and European banks are maintaining a similar fiction on property loans. Between 2003 and 2007 European real estate financing grew by 58% to $2.3 trillion so that commercial real estate debt represented 176% of the capital base of European banks, or 12% of their loans. “Reality will kick in with a wave of maturity defaults between 2011 and 2014 during which the 70% reported LTVs will rise to 100%-plus,” he says. “The writing is already on the wall – just 25% of European CMBS loans maturing in the last two years were repaid or repurchased by the originator and a wall of maturities looms this year.”

Banks’ fragility will only increase their desire to offload these loans. International banks have been by far the most active, having been forced by the financial crisis to exit the market and clear books of hung loans and stray tranches. He quoted the reported sale in December by Credit Suisse of a $2.8 billion-plus portfolio to Apollo Global Management. Pressure is rising on German banks in particular since Basel III rules means they need an additional $69 billion in Tier 1 capital by 2018. In addition, many are heavily exposed to sickly real estate in the US, UK, Ireland and Spain. “Extend and pretend can only be a temporary feature of this marketplace,” he writes. “The coming wave of European NPLs could provide welcome diversification for US and Asian investors. The opportunity in Germany alone is big enough to create a discrete asset class. We think that at least $20.1 billion of commercial real estate NPLs will come onto the market over the next three to four years.”