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The release by the European Central Bank (ECB) of the results of its Asset Quality Review (AQR) on Sunday will say a lot about the prospects for the real estate sector, according to CBRE's head of EMEA research Neil Blake.

'If the AQR gives banks鈥� balance sheets a cleaner bill of health than expected it will be because of the recent recovery in property values. If it turns out to be worse than expected it will be because the true extent of property value declines since the peak has not been reflected in bank鈥檚 accounts yet,' Blake told PropertyEU.

Commenting ahead of the publication of the AQR, he noted: 'Either way, the state of the property market will be a key inflecting factor. Depending on the results of the AQR, banks may be encouraged to lend more, although there may still be limits on expanding lending to commercial property.

'If the AQR produces disappointing results it will be more bad news not just for property but for the prospects for the eurozone鈥檚 economic recovery and it will likely lead to an extension of the 鈥渓ower for longer鈥� interest rate policy and possibly to a full QE programme by the ECB.'

NAMING AND SHAMING
The Asset Quality Review will mark the end of the 鈥榚xtend and pretend鈥� era as banks are forced to divulge the true state of their loan books, Jos Short, founding director of London-based investment manager Internos Global Investors predicted in September.

With the risk of being 'named and shamed', there has been, and continues to be, a rush by banks to unload their loan books, often at discounts close to 50%, within a relatively short period.

It is estimated that 鈧�584 bn of real estate loans remains to be worked out, against 鈧�41 bn sold to outsiders in the first half of 2014 and 鈧�31 bn in the whole of 2013. This means that a large amount of distressed real estate assets still has to come onto the market. US investors in particular are looking to take advantage of this rush, and it is estimated that 77% of the money that is buying into the eurozone loan book is attributed to them. Moreover, they are buying into loans largely secured against secondary real estate assets.

A total of 760 bank loan portfolios have been selected for detailed examination as part of the ECB鈥檚 AQR process which started in November 2013 and is due to complete in October 2014. This covers total bank book risk-weighted assets of approximately 鈧�3.7 tln representing 58% of the total of 鈧�6.4 tln credit risk-weighted assets of the in-scope banks, of which corporate loan portfolios make up 65% of selected assets.