The major issues of 2018 included capital flows into real estate debt, political factors including Brexit, the revival of a European CMBS market and the growing conversation surrounding ESG and diversity and inclusion in the industry.
Below are some of the best quotes on the key topics from our coverage of 2018:
On operating in a late-cycle market…
“Unless there are extremely clear and unambiguous warning alarm bells, lending organisations will generally keep on lending even if the market is looking overheated. Waiting for everyone to agree that all metrics emphatically signal that the market is overheated is definitely leaving it too late.” Rupert Clarke, chairman of the debt working group established by the UK’s Property Industry Alliance, on the need for lenders to adapt lending policies late in the cycle.
“At this stage in the cycle, a lot of risks are on the downside, not the upside. The challenge now is assessing those risks and adding value, and so outweighing potential, wider market risks and the risk of [interest] rates increasing, yields moving out.” A pan-European investment manager tells the ULI/PwC’s Emerging Trends Europe survey how he sees the world.
“There is no room for complacency, but given the level of equity in the market, it’s less likely that a borrower will need to hand over the keys to the lender if values were to fall.” Ian Malden, valuation director at Savills, on the level of leverage across the UK property lending space.
On the appeal of debt to investors…
“Many investors today are equity and debt agnostic; they also invest globally and are open to a wide range of opportunities.” Emma Huepfl, co-founder and board director of Laxfield Capital, speaking at the CREFC Autumn conference, on why investors are putting money to work in debt strategies.
“We see appetite from fixed income investors as well as real estate allocations, as it has become an investment class of its own.” Chris Bates of Barings Real Estate on the firm’s decision to raise external investor capital for its European debt strategy in 2019.
“As we get into a market where equity valuations look toppy in parts, certain investors are looking at debt to replace or complement their equity exposure. On the other hand, traditional fixed income investors, considering where interest rates are, are looking at real estate debt as an alternative and a way to capture the illiquidity premium.” Anila Thompson, distribution director, global funds advisory, JLL, speaking at the CREFC Autumn conference explains her investor clients’ attitude to debt.
“This interest rate cycle will end soon, taking away the tailwind driving capital values. So, the equity return is becoming more challenging to source. Through debt, you can achieve similar returns to equity, for a lower risk profile.” Nick Ward from AustralianSuper’s Mid-Risk division, based in Melbourne, explains why the pension giant is investing in European real estate debt.
On changing loan structures…
“We don’t want to be in a position where we are forced into a fire sale or to take action that is counter-intuitive to our business plan.” Gadi Jay, explaining at the Loan Market Association’s May real estate finance conference why the US private equity giant aims to avoid hard covenants and insists on capital structures which allow it to implement complex value-add business plans.
“It’s undoubtable that the market is heading more towards covenant-light in Europe and you’re seeing CMBS coming back with covenant-light structures.” Chris Semones, executive director at Goldman Sachs, speaking at CREFC’s Spring Conference.
“There is a huge amount of private debt capital available and this is growing. Consequently, spreads are driving down in certain segments. We are also starting to see more risky lending activities such as covenant-light packages.” David Snelgrove, managing director at private equity firm Oaktree Capital, discusses the impact of increased volumes of debt capital at CREFC’s Spring Conference.
On the state of European markets…
“There’s a lot of discussion about Brexit and what that means, but two key aspects – the office investment and its occupational market – have been incredibly resilient.” Madeleine McDougall, head of Lloyds real estate lending business argues an optimistic case for the UK market, despite Brexit.
“Even if the economy dips, the UK is one of the strongest in the Western world and it will come out of it, but we are looking at how fast the UK could agree bilateral trade deals.” Sabine Barthauer, member of the board of managing directors at Deutsche Hypo, offers a German banker’s perspective on Brexit Britain.
“[Spanish] Banks have learnt from the past, and they are nowadays very prudent, especially when their risk department analyses projects, companies or developers.” Jordi Argemí, chief finance officer at Neinor Homes, says Spain’s banks are back lending, on a far more cautious basis than in the last cycle.
“I am working on a number of deals, which are likely to close soon. In several of them, I noticed debt providers trying to reprice following the spike in Italian sovereign debt yields after the election of the new government.” Gaetano Carrello, a real estate finance partner at Italian law firm Gattai Minoli Agostinelli & Partners, based in Milan, discusses lenders’ reaction to Italy’s populist government in June.
“The longer we are into the cycle, of course there is less headroom. But the fundamental basis for the German market is strong and headroom is not shrinking dramatically, so banks don’t need to be too concerned.” Christian Schmid, board member for real estate at Helaba admits German property bankers face a tougher market, but insists business remains brisk.
On the return of the CMBS market…
“The European CMBS market has been reviving, arguably from a low level in 2016 and 2017.” Christian Aufsatz, head of European structured finance at ratings agency DBRS on the scale of the revival.
“It’s only a matter of price, either CMBS prices stay low or the banking space needs to price loans more expensively, which would make CMBS competitive again for the needs of certain borrowers.” Laurent Mitaty, co-deputy head of asset-backed products at Société Générale Corporate & Investment Banking explains CMBS only works when the pricing is right.
On remembering the Lehman crash, 10 years on…
“Lehmans had gone, Hypo [Real Estate] had gone, and RBS was wobbling. It just felt like the end of the world. We were genuinely trying to transfer our personal deposits and cash into HSBC. There was a common theme that if HSBC went under then we’d be knocking things together to make fire.” Peter Denton, finance director of Hyde Housing, who was at the time a leading UK real estate debt financier, remembers the Lehman crash.
“Organisations weren’t necessarily set up to deal with the issues that they had because the people that had originated many of those positions were no longer around. Many organisations were just trying to figure out what they had.” Former Merrill Lynch head of real estate trading, Nassar Hussain, was working in private equity, based in Dubai, now managing partner at London-based real estate investment banking firm Brookland Partners, recalls the confusion caused through the market.
“From a real estate perspective, by the beginning of 2009 there was literally no liquidity.” Chris Lee, KKR’s head of real estate America, who was then a vice-president in Goldman Sachs’ Real Estate Principal Investment Area, recalls the impact on the US market.
On the rise of specialist lenders…
“Every week we have a bank coming to ask how to lend through us. We have noticed a big increase in challenger banks and pension funds offering funding lines to us.” Guy Harrington, chief executive and founder of specialist lender Glenhawk explains banks are keen to finance emergent specialist platforms.
“Institutional investors are clearly attracted to the specialist lending space because they are looking for income.” Rod Lockhart, managing director of LendInvest Capital, explains why institutional capital is moving towards niche lending platforms.
On progress on ESG…
“There is now widespread scrutiny from the debt side on sustainability issues, not only because of regulatory clouds on the horizon, but also because sustainability is seen as a risk factor itself. A further reason can be the need to communicate on the sustainability of the loan or bond portfolio to investors directly or indirectly invested in the portfolios.” GRESB’s head of EMEA, Josien Piek explains why lenders need to get with the ESG agenda.
“Having a sustainable strategy has become a competitive advantage. Investors are demanding green investments, while financiers are starting to reward owners of green buildings with improved loan rates. Financial institutions themselves are now required to give more disclosure on green lending.” Hein Wegdam, ING’s director of sustainable real estate products, on the benefits of sustainability to banks.
On discussing diversity and inclusion in real estate finance…
“In the year that the Presidents Club scandal broke, it felt really important to put leadership, diversity and inclusion centre stage.” Peter Cosmetatos, chief executive of CREFC Europe on the decision to put D&I top of the bill at the body’s Autumn Conference.
“We need to be getting into schools and getting the next generation excited about construction and real estate. Look outside the box in recruitment policies. Get kids – not your friends’ kids – from different social backgrounds in for mentoring, for example.” David Mann, partner at surveyor Tuffin Ferraby Taylor, who co-chairs Freehold, a networking group for LGBT real estate professionals, urges property firms to focus on D&I.
“The Presidents Club has triggered lots of other conversations with the next generation in our industry who are embarrassed to be associated with a sector that would participate in that kind of thing.” Jane Hollinshead, principal of IJD Consulting and board member of Pathways to Property, which focuses on social mobility in the real estate industry, discusses the impact of the Presidents Club scandal.
“If you think 3, 4, 5 percent of your workforce have disability needs, that is an under-representation – it should be 19 percent. It means you have people in your organisation probably operating sub-optimally.” Mike Adams, chief executive of Purple, which campaigns for businesses to see disability as a commercial opportunity, speaking at the CREFC conference on getting to grips with the issue of disability in the workplace.