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, UK CMBS investors were owed a total of €77 billion ($101.8bn, Dh374bn), according to a recent Barclays Capital report.

Around €35bn needs to be refinanced by 2012, Barclays said, at a time when UK banks are cutting back their exposure to the property sector.

As a result, the number of CMBS loans in trouble in Europe, the Middle East and Asia (Emea) is expected to "rise significantly over the coming quarters and years," rating agency Moody's said in a report on Monday. Troubled CMBS deals in recent months include those for care home owner NHP, retirement home company Four Seasons, pub owner Punch Taverns and landmark London office building Plantation Place.

"2008-2009 marks the start of the first significant downturn in the history of the Emea CMBS market, which will be characterised by substantially increasing default levels of securitised commercial real estate loans," Moody's said. Average UK commercial real estate prices have fallen by 40 percent since a market peak in mid-2007, meaning many CMBS deals have breached covenants linked to the value of the property. In addition, emptying buildings mean shortfalls in rental income to pay debt interest.

"Tenant vacancies are going up, default rates are increasing and rents are under pressure ... so now you're starting to see payment defaults," said Gareth Davies at Close Brothers. "You're starting to see this in the UK, Spain, France, where we have picked up new mandates. Not yet in Germany but there will be some," he said.

Close Brothers is pitching to restructure two UK CMBS deals at the moment - worth about £1bn each, and both "well under water".

Globally, investors have $92.6 billion to invest in property debt trading at distressed levels, according to research and consultancy firm Prequin.

"The market has grown substantially from 2002 when just six funds (worldwide) raised a total of $1.04 billion ... it only really took off in 2007 when the effects of the credit crisis became apparent," said Tim Friedman of Prequin.

Eleven funds are now seeking to raise about $6.5 billion to invest in Europe. North America is the most sought-after market, with 78 percent of funds totalling $72 billion being raised to target the region, he said.

Most distressed investors are focusing on simpler structures rather than the more complex, multi-borrower, multi-lender structures of CMBS deals.

Funds will adopt a range of strategies to buy property assets.