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US and European commercial property markets facing challenging times

Painful economic downturns in the key European property markets of Britain, France, Germany and Spain will hit occupier demand and slash rents over the next two years, further dimming prospects of a quick recovery, the survey from Reuters has found.

Meanwhile the latest commerical price monthly index from CB Richard Ellis shows that UK commercial property prices fell a further 2.1% in April.

'I cannot see France, Germany or Spain returning to growth before 2011. Values may well bottom out in the second half of 2010, but the problem is going to be falls in rental values dragging down capital values,' said Keith Steventon, head of research at Atisreal.

For the UK, whose credit-fuelled property market has fared worse than others in Europe, forecasters expect to see the first signs of a recovery later this year, albeit confined mainly to higher-end properties.

Forecasters on average see UK values falling a total of 18% this year and 3% in 2010, halving prices from their mid-2007 peak, while average rents are expected to drop by 11% in 2009 and 8% in 2010.

And there is concern about commercial mortgage backed securities. According to a report from Deutsche Bank at least two thirds of the $410 billion of US such that mature from this year through until 2018 are not likely to qualify for refinancing.

The bank's predictions are worse for loans made in 2007 at the height of the commercial real estate bubble and it says 80% are unlikely to qualify.

As CMBS loans make up only about 20 to 25% of the entire commercial real estate market, other sources of financing, such as insurance companies and banks, are likely to see similar or worse potential defaults, the report said.

In the US commercial prices have fallen about 25 to 30% from their peak, according to the report. Prices could further fall, resulting in values declining 40 to 50%t.

When those loans come due the available lenders will finance a lower percentage of property value and that value is almost sure to be less, leaving a gap of about $100 billion, Deutsche Bank estimated. Many borrowers will end up defaulting as investors will not pay more than what the property is worth.