Global Property Outlook and Role of Real Estate in the European Financial Crisis

  • October 22, 2011
  • • Written by: Robert Peto MA, FRICS 

Fall 2011, Vol. 36, No. 2
Abstract: This article traces the relationship between real estate and the global financial crisis (GFC), and the failure of financial regulators and central bankers to understand the dangers of asset price bubbles. A skeptical note is introduced about the ability of Basel III on its own to reduce the likelihood of future financial crises. GFC Round One in Europe exposed the excessive lending to the commercial real estate sector which has not yet been properly provisioned. Some 80 percent of real estate debt is “secured” against poor quality assets, a problem the banks have not really addressed. This unresolved problem has made GFC Round Two much worse as the European banks are also heavily exposed to poor quality sovereign debt. Default could lead to another banking crisis requiring another round of recapitalization. This uncertainty, coupled with the risks of a breakup in whole or in part of the euro zone, make cross-border investing risky and is adversely impacting business and consumer confidence with knock on effects on occupational markets. Exceptionally low interest rate structures are currently holding the show together, but there is no confidence that European commercial real estate values have any further significant upside in the next few years.