German firm on look out for distressed US commercial property as prices continue falling

Germany’s biggest insurer, Allianz SE, is circling like a vulture ready to snap up real estate bargains in the US commercial property market as values continue to slide and banks move to foreclose on more distressed borrowers.

According to the latest figures from Moody’s Investors Service, commercial property prices in the US have already dropped almost 39% from a peak in October 2007 but are still not quite low enough for Allianz who expect further falls.

‘The pricing isn’t where it ought to be yet.

We think there are going to be some very attractive buying opportunities but they haven’t happened yet,’ said the firm’s head if finance Paul Achleitner.

Allianz is looking for bargains in real estate and private equity to boost returns from its portfolio of more than $600 billion with buildings in New York and Boston at the top of its shopping list.

In the US commercial property owners are struggling to pay debts. Defaults have contributed to at least $1.6 trillion of credit losses and writedowns worldwide since 2007, and Achleitner says those losses will deepen before the market improves.
 
Analysts from Credit Suisse Group said that the volume of delinquent commercial mortgages jumped sevenfold to $22.4 billion last month. Defaults on US shopping malls, skyscrapers and hotels are expected to keep increasing, they said.

The problem is that borrowers who took out mortgages expecting rents and occupancies to rise but the worldwide credit crunch has hit hard and banks don’t want to own the buildings so they are going to have to off-load them at some point.

‘The banks don’t want to repossess because the moment they own it, it bears on their capital.

They’re actually reorganizing the stuff, anything, as long as they don’t have to take it on their balance sheet,’ said one analyst.

In contrast the UK’s commercial property market is recovering and delivered the largest monthly capital growth since June 2006, at 1.1%, according to the Investment Property Databank Monthly Index for September.

While the monthly capital growth figure is the largest in more than three years, it was contained by continued falling rents.

Yield impact, which measures the influence yield movements have on capital values, was 1.75%, the strongest positive figure since December 2005.

All commercial sectors delivered positive capital growth for the first time since May 2007, led by retail with 1.4%.

Industrial values rose 1.1% and office values increased for the first time since July 2007 with 0.8%.

All-property initial yields dropped for the fourth successive month to 7.7%.