And so another year draws to a close. As far as European real estate finance was concerned, 2017 was interesting, if nowhere near as tumultuous as 2016. It was a year in which the benefits of real estate debt in a late-cycle market became apparent to many, despite the challenges faced by those tasked with writing loans. There are plenty of lessons to take into 2018; here are 10 to consider.
1. Capital is moving towards debt vehicles: According to Real Estate Capital data, there has been a spike in European real estate debt fundraising for private vehicles this year; during the first nine months, €5.3 billion was raised, overshadowing last year’s €3.4 billion. DRC Capital, LaSalle, AXA IM – Real Assets and PGIM Real Estate were among the long-standing lenders to raise the fresh wave of capital. It shows that, in this top-of-the-market phase of the cycle, investors value the defensive qualities of debt.
2. New lenders are still entering the space: Private equity firm GreenOak Capital raised €600 million for its first European property debt fund, Canadian giant Brookfield brought its lending business to Europe for the first time, and property companies are said to be increasingly writing debt to each other. Traditional real estate equity investors in Europe are hedging their bets by adding debt to their capabilities.
3. Deals became (even) harder to source: There were fewer large-scale investment deals for banks and alternative lenders to finance, and an increase in activity from cash-rich investors, including from Asia, meant debt requirements did not always cross European lenders’ desks.
4. Innovation is happening, fast: Underlying real estate markets are changing. Co-living and co-working became the buzz-phrases of the year, with WeWork the most talked-about occupier. The lending community has arguably been a little slow to get to grips with technology and change in the sector, so the knowhow to underwrite less traditional property from a debt perspective will be important in 2018.
5. Interest rates became a talking point: The first rise in interest rates in the UK for a decade, as well as the expectation of further rate rises in the US market in 2018 put the prospect of an end to the ‘lower for longer’ environment front and centre in lenders’ thoughts. The consensus is that rates will remain low for a while yet, but the rises served as a reminder that low rates cannot be taken for granted.
6. Investment banks pulled out the big guns: Some of the year’s most notable deals were done by private equity firms – often Blackstone – and took the form of platform purchases, such as the Sponda Finnish mixed-use platform. When these mega-deals did happen, investment banks including Morgan Stanley, Bank of America Merrill Lynch, Goldman Sachs and Deutsche Bank proved they still have the appetite to finance large tickets in short timeframes.
7. CMBS is not dead yet: It took until November for the first publicly sold CMBS of the year to happen in Europe. BAML securitised a loan to Blackstone secured on a UK portfolio of last-mile logistics. Investors clambered for notes, which priced tightly at 85 basis points at the AAA-rated end. It is unlikely to herald the return of European CMBS, but it did show that such deals remain an option for banks.
8. NPL activity shifted south: Regulatory pressure on banks to deal with problem loans ramped up this year, and Spain’s banks were among those to take action. Cerberus bought the bulk of BBVA’s property assets, while Blackstone formed a JVwith Santander to work through the real estate book of Banco Popular. Italian banks used securitisation, in some cases, to offload toxic debt.
9. Some showed it’s possible to go green: ‘Green’ lending remains small-scale in real estate, but Berlin Hyp issued its second unsecured green Pfandbrief and Lloyds closed a major syndicated loan with environmental criteria written into it.
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