Banks are preparing for a major sell-off of commercial property assets in the UK in what will be the “defining theme” of the commercial property market in the coming decade, says Rob Martin, head of research at Legal & General Investment Management's property division.
The key sellers will be RBS, Lloyds and NAMA (the National Asset Management Agency), he said. NAMA is the body created by the Irish government in 2009 to buy property debt in exchange for government bonds.
“The restructuring of the capital base, away from banks towards other sources of capital, is going to be the defining theme for the next five to ten years. It's nowhere near done,” said Martin.
The buyers are likely to be European insurers, pension schemes and emerging market banks.
For insurers, the push to enter the market will come from the EU's incoming Solvency II regulations, which are designed to ensure the financial stability of European insurance firms. Martin says the rules “treat commercial mortgages quite favourably”.
Martin believes European regulators will also ensure that pension schemes are incentivised to buy commercial property debt.
However, because of their low appetite for risk, insurers will only want to invest in commercial mortgages with low loan-to-value ratios and stable income streams, such as office buildings occupied by major corporates on long leases, or buildings leased to the government or to major retailers.
Buying debt in riskier assets such as property development projects will not appeal to most insurance firms, said Martin, especially if the property developers employ a lot of leverage.
Banks in countries such as China, India and Brazil may step in to buy these assets if they see growth potential. However, Martin said there will be some volatility while the market adapts.
“It's not a straightforward process, I suspect it's going to be quite bumpy,” he said.
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