McKinsey Study Finds European CRE Financing Industry Was Never Really Profitable
Yet one more nail in the CRE coffin, and another reason why extend and pretend will be with us for years to come, lest investors wake up and find out just how screwed this country's economy really is. In the meantime, IYR is going to the moon. A new McKinsey study looks at the CRE lending industry and finds some very disturbing things. Such as that even in the peak market years of 2006-2007 the European CRE finance industry did not cover its cost of capital!!! One can only imagine what the reality must be like currently in the dead zone that is European Commercial Real Estate financing (and also in those barbaric lands west of the Atlantic). Yet somehow the Euro keeps appreciating every day against the dollar. Let the Kool Aid flow.
More from McKinsey:
“Our research has produced two key findings. First, the industry as a
whole does not return its cost of capital (defined as equity) even in
the best of times, let alone over the business cycle. Put another way,
the “profits” recorded in good times are in fact economic losses to
equity holders; worse, they fail to provide a cushion for the
significant losses that come in industry downturns.”
And with the reading-challenged equivalents across the Atlantic of CIT's deal makers deciding what deals deserve financing, it is no wonder every dollar "invested" into CRE loans is a dollar burned.
"Because of these dynamics, we expect that even after the current crisis
has faded, the CRE finance industry will continue to destroy value."
The McKinsey survey was based on eight large European banks while several
others granted supplementary data. Collectively, McKinsey
estimates that these two groups comprise about 40 percent of the CRE
loans outstanding on balance sheets across Europe. The survey spanned
2006 and 2007, the final two years of the property boom, providing a
clear picture of how the industry performs in good years. God help these banks if the McKinsey study were extended two years past the sunset of the 2007 "best year" for CRE. Of course, the toxic sludge is still on the balance sheets. However, courtesy of even more loose regulatory requirements than in the US, these don't have to be disclosed until the impairment is practically 100% and a 100% loss follows. In other words, a binary environment where everything is either tip top or Armageddon. One hopes the switch to the latter does not occur in our lifetimes.