Debt buyers eye bombed-out real estate market

By Tom Freke and Daryl Loo

LONDON (Reuters) - Real estate funds are spying rich pickings from carnage in commercial real estate, stockpiling cash to buy discounted loans that may cost banks billions of pounds in the coming years.

Mortgages supporting high-profile office or shopping mall deals are in dire need of refinancing after a record crash in prices in 2008 that has hit commercial property markets much harder than its residential counterpart.

Orchard Street Investment Management, for instance, plans to spend millions buying up loans from lenders left over-exposed by the property boom that ended in 2007, hoping to make good money once markets recover.

"The starting point (for us) are banks who are interested to find partners to help them work out the situation, and there are beginning to be a number of deals where you can have these discussions," Chairman Chris Bartram said.

The collapse of Dunfermline Building Society this past weekend came partly because of an ill-timed move into commercial property lending in 2006 and 2007.

Britain has had to come to the rescue of Lloyds and Royal Bank of Scotland after their large commercial mortgage portfolios landed them in trouble.

Many of the largest property deals were funded in the market for commercial mortgage backed securities (CMBS), in which debt is sliced into tranches and sold off to bondholders.

By the end of 2008, CMBS investors were owed a total of 77 billion euros (70 billion pounds), according to a recent Barclays Capital report.