WASHINGTON, DC—More than 800 people convened at the JW Marriott hotel here for the CRE Finance Council’s Annual Conference, held over a three-day period ths week. Capital—where it’s coming from, where it’s going, its cost and potential impediments—was the topic du jour during the event, which attracted some of the biggest names in the commercial real estate financing arena.
One of the hottest sessions was the “Gauging European Sovereign Distress & Global Impact” panel. Speakers Matt Webster, global head of real estate finance for HSBC London; Steve Franck, a senior director with Alvarez & Marsal Europe; and Faisal Ashraf, Credit Suisse’s head of commercial real estate asset finance, were frank in their characterizations of the region and where it was headed. As Webster noted, even the strong players are impacted by the European crisis. “The difficulty is that while we may have avoided a lot of the problems in Europe, everyone else hasn’t.”
In fact, confidence is so poor that in the hardest-hit countries, customers are taking their money out of banks. If the crisis spreads, agreed the panelists, this will become a common occurrence.
Franck, who works out of Greece, tagged the situation dire and noted that bankers sometimes have to be escorted to work by guards. “No one seems to get paid there,” he explained, adding that in the past three to four months, the government employees have taken wage reductions aggregating about 35%. “Pensions have been slashed. You’re seeing a lot more people on the street. Pharmacies aren’t getting paid, so they’re not providing medicine to hospitals, which are telling patients to bring their own medicine.”
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Part of problem in Greece, Franck said, is that there are too many banks. For the region, the country isn’t a huge factor—it’s only 2% to 3% of the EU’s total GDP—and while a lot of banks have exposure to Greek debt, it’s survivable. It’s possible that some countries could de facto walk away from the euro as a currency.
The latest country to ask for help, Spain is trying to avoid the civil unrest that Greece is experiencing, said Webster. The belief, he said, “is that Germany will sacrifice Greece to save Spain,” a strategic political move. He noted that there’s $100 billion worth of land loans in Spain alone, and that’s what’s doing poorly. As for commercial real estate, only 40% of loans are performing.
“Part of the problem in Europe is it needs more federalism,” said Ashraf. More cohesion is necessary to bring the countries’ fiscal houses organized, and ultimately, they must cede control of the overall financial market to a central controller, like Brussels. “How realistic is that? I don’t know.”
Transparency is also necessary in Europe, even more so than in the US, noted Webster. “If you look at any sector that’s doing well in Europe, it’s the corporate sector, and that’s because it’s transparent,” he pointed out. An overhaul of the labor system wouldn’t hurt, either, added Franck. Unemployment is a major issue on the Continent, especially among younger generations
Looking ahead 12 months from now, the experts weren’t exactly bullish. Franck expects the region to muddle along for a while, with some countries giving up the euro as their currency later this year. Webster sees a more cyclical pattern, with nothing much changing. “It’s going to be a crisis, followed by muddling along, then crisis, then muddling along—it’s the standard cycle of the European market,” he explained. “When you have 27 different constituencies, all of which have their own constituencies, unless everyone agrees, no one’s going to come off the fence.”
The good news is that the situation in Europe could bode well for US investors, though not necessarily immediately. Webster pointed out a large funding gap, where US players could do debt deals. On the acquisitions side, there’s a lack of product for sale and buyers and sellers “are on different planets” in terms of pricing, said Ashraf. Last year, there were only about 3 deals worth noting in Europe. “The opportunities are probably in 2013 or 2014. There’s nothing to get excited about in Europe now, but you’re not supposed to get excited about it now.”
Franck added, “If I were someone in the audience, I’d start doing the work. If we can get these banks recapitalized, and get them to take losses and reprice, there will be some opportunities to acquire assets.”
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