Phillip Moore’s article in Euromoney describes many investors and much money (from both UK and US investors) allocated to snapping up distressed commercial real estate debt.  What’s interesting to us is the indications in the article that it’s the banks that are unwilling to sell – that is preventing the investments – NOT a need for federal financing…

“There are three principal reasons explaining why, to date, so much of the cash that was earmarked for investment in commercial real estate debt remains “hors de combat”. The first is that in spite of the precipitous falls in values in the commercial property market over the past year, the general consensus appears to be that values still have further to drop.

Another reason explaining why there appears to be a disequilibrium between supply and demand in the commercial real estate debt market is that in spite of the bleak outlook for values, there is still a reluctance among European banks to offload their holdings, or even to acknowledge how distressed their exposure has become.

“There has been a widespread misconception that as commercial and investment banks looked to restructure their balance sheets they would start by marking their real estate books to a more realistic valuation and then look to sell significant volumes of those assets at those prices,” says Cairn Capital’s Henriques. “We have seen very little of that happening, largely because the markdowns the banks are being quoted on their debt valuations are such that they regard the benefits of selling them as somewhat ambiguous. The capital write-downs they would have to take from such a strategy are such that they would erode most if not all of the capital relief they would generate by selling. So while we are confident that there will be opportunities to acquire bank debt, it won’t be the avalanche that some people were expecting at the tail end of last year.”

We think the debt will not be available for the investors to “snap up” until the banks are willing to take what is offered. Granted, the Geithner plan makes overbidding easier, but to bridge the yawning gap that exists now, is going to make the plan very difficult to implement.