One-fifth of real estate funds face refinancing in the next 12 months. Many funds are already struggling with breaches of their loan-to-value (LTV) covenants. In 2010, it is predicted that income cover ratio (ICR) breaches will start to occur, brought about by tenant defaults, reduced rents and higher vacancy rates. What is certain is that funds will find it very difficult to arrange new financing and, even if successful, will encounter higher debt costs.

While debt has triggered the current problems that funds are encountering, it is not just the breaches of LTV covenants that have caused this. There are other underlying issues:

•      Sales are restricted due to falling prices.

•      Open-end funds are suffering from attempts by investors to exit.

•      Investors are threatening to default on undrawn commitments.

These issues have driven fund managers to look at restructuring not just