European property needs more bank wannabes
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
LONDON — Europe’s property market needs more bank wannabes. Axa has set up funds to invest 2.5 billion euros in real estate debt. The move suggests insurers could help ease the refinancing burden left by Europe’s shrinking banks. Many of these loans will still be deemed too risky. But the French group may point the way for others.
Europe’s banks have retreated from property lending as they struggle with overstretched balance sheets and legacy loans made before the crisis. At the start of last year only around 10 banks were lending in size, and some of those have since pulled back, according to market participants. Funding could get tighter in the coming years: over 450 billion euros of commercial property loans come due between 2011 and 2013.
Insurers are well placed to fill the gap. They like stable, predictable cash flows, and are hungry for assets that offer higher yields than bonds. Previously insurers bought commercial mortgage-backed securities. But that market has dried up, so it makes sense to seek direct exposure.
Axa is leading the charge. Its funds — worth 2.5 billion euros — are small compared to the mountain of outstanding property debt. But other insurers should follow, pushed on in part by new regulations that encourage them to diversify their assets.
Property firms shouldn’t expect insurers to replace banks overnight, however. Some lack the expertise and infrastructure. Insurers own investment criteria may also make their loans less attractive to borrowers. European property investors are used to short-dated loans that can be easily and cheaply refinanced. Insurers want longer-dated paper that more closely matches their liabilities.
Insurers are also likely to avoid borrowers with too much leverage or loans secured against weaker assets. That means they won’t reach the parts of the market most in need of help. About 145 billion euros of European real estate debt coming due by 2014 is too leveraged to be easily refinanced, according to DTZ. Much will need to be restructured first.
Over time, the emergence of non-bank lenders should lead to a more diverse and stable real estate funding market. Insurers may not be able to solve this crisis, but they may be able to help avoid the next one.