As the year draws to a close, we have reflected on our coverage to consider the trends that had the greatest bearing on the European real estate finance space in 2018. Here are 10 factors we think set the agenda.
1. New entrants set up shop: A constant refrain was global investors like the late-cycle risk-adjusted returns profile of real estate debt. When final calculations are done, it is likely 2018 will not have been as big a year for Europe-focused property debt fundraising as 2017, which was a bumper period. However, 2018 was notable for the new entrants lending directly, or raising capital with that intention; among them big names such as Amundi and AustralianSuper.
2. Lenders became more selective, but many hunted for a little extra yield: Senior loan pricing remained low and competition for core lending opportunities high. Some lenders, including commercial banks, took a more selective approach to what deals they would target. However, some made the decision to introduce an element of additional risk into their books through financing development or buildings subject to value-add business plans.
3. Demographics was a watchword: With the very nature of some property types – retail springs to mind – being questioned, investors focused on assets likely to benefit from long-term demographic trends. Student housing, private-rented sector housing and elderly care homes were popular buys, with lenders following suit.
4. CMBS reappeared: Between mid-2016 and the end of 2017, the maths of securitisation did not stack up for lenders. However, lower note margins across the asset-backed securities space, and a widening investor base, meant it made sense again in 2018. Morgan Stanley, Goldman Sachs and Bank of America Merrill Lynch funnelled some of the year’s most interesting high-yielding deals into the CMBS market.
5. Covenants were a negotiating point: Concerned voices were raised during the year, suggesting there was a slide to covenant-light deal structures. Discussion was fuelled by the lack of financial covenants and loose change-of-control requirements seen in some of the new CMBS deals. Others argued loan structures were merely being updated to allow flexibility for borrowers to execute value-add business plans.
6. M&A got interesting: Savills Investment Management’s purchase of a minority stake in DRC demonstrated demand in the institutional real estate world to tap into the success of non-bank lenders. Elsewhere, LaSalle and AXA Investment Managers – Real Assets used acquisitions to expand their reach in US real estate debt.
7. D&I was forced on to the agenda: January’s report by the Financial Times on the Presidents Club – many members of which were from property companies – dragged the sector’s reputation through the mud, albeit those implicated were not from the finance part of the industry. The fallout thrust the topic of diversity and inclusion on to the agenda, including a headline spot at CREFC’s Autumn conference. There is a long way to go, but the discussion has at least started.
8. ESG credentials were flaunted, but more progress is needed: Lenders including ING Real Estate Finance and Credit Agricole pioneered financing structures that incorporated sustainability measures into property lending deals. It demonstrated the scope for environmental, social and governance considerations to be incorporated into real estate financing deals. Such deals, however, were the exception to the rule.
9. The Greek NPL market finally took off: Across Southern Europe, regulatory pressure continued to force banks to offload legacy debt, much of which was secured by real estate assets. Spain was the largest non-performing loan sales market, with the US investment banks financing buyers of portfolios. After much expectation, the first Greek NPL sale was closed, with Bain Capital the buyer. Bank of Cyprus also got in on the act, offloading the island nation’s first large-scale portfolio.
10. Property fundamentals kept lenders positive: European politics is in disarray and no one knows when the real estate cycle will end. However, despondency was kept at bay due to the fact commercial real estate continued to deliver returns and, on a relative-value basis, looked attractive. A correction is overdue, but if 2018 is anything to go by, lenders will continue to lend at reasonable volumes in 2019. Cass Business School figures showed H1 2018 UK lending volumes were up 27 percent year-on-year, to £22.5 billion (€25.7 billion). Lending appetite clearly remains high.
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