2020 review: REC’s year in interviews – part 3

In the third instalment of our 2020 interviews review, we revisit discussions on diversity, responding to covid-19, and how lenders are dealing with troubled loans.

In the third instalment of our review of Real Estate Capital’s 2020 interviews, we speak to the head of CBRE Loan Services about diversity in the real estate finance industry, a leading Nordic non-bank lender, and the head of a loan servicing platform about troubled loans.

Clarence Dixon, CBRE Loan Services

In December, as one of six interviews on the subject of diversity in real estate finance – which can be found here – we spoke to the head of CBRE’s diversity network in Europe, who also leads its loan servicing platform, to discuss what can be done to improve diversity. The full interview is here.

Clarence Dixon | Diversity in real estate debt | Real Estate Capital
Dixon: outreach is crucial to improving diversity

“When a person of colour walks into a job interview they’re already at a disadvantage, at least from their own perspective, because of the colour of their skin,” says Clarence Dixon, head of consultancy CBRE’s loan servicing business. “Interviewers don’t expect you to be what you are, or where you are. It comes as a surprise to them.”

Dixon, who also runs the company’s diversity network in Europe, believes the real estate industry needs to work harder to create opportunities for people from minorities.

He is continually reminded that he is one of few senior black figures in the industry. “I speak at 10 to 15 conferences per year throughout Europe and I’m usually the only black guy in the room. I ask myself constantly ‘where are the other up-and-coming minority people in this business?’”

In 2019, he took on the leadership of the Reach Network, CBRE’s support network for employees from a variety of backgrounds. Initiatives include a new work-study programme, which is intended to target students from ethnic minority backgrounds and ensure that work placement opportunities are not available only to friends and family of existing employees. The goal is to reach out to communities whose members would not typically be inclined to pursue careers in commercial real estate.

“As an industry, we need to stop looking at Oxford, Cambridge, Reading – the usual places from where people are recruited – and actually go out to minority communities, into schools to say ‘this is what we do, and there are opportunities – we’re talking directly to you’.”

Dixon insists cultural change within organisations is also crucial. “You need to start at the top and ensure the leaders and middle management go down the same route. A business is like a tanker: you can turn the wheel, but it doesn’t move straight away. Last year, we mandated all executive directors to do unconscious bias training and it took six months.”

He believes people should be incentivised to promote diversity and is pushing for targets to be part of managers’ objectives. “They should not just measure whether you hit revenue targets.”


Pontus Sundin, Brunswick Real Estate

In November, we spoke to Pontus Sundin, head of debt at Stockholm-based manager Brunswick, on how real estate markets have held up in Sweden – a country that took a different approach to combatting covid-19 than most of Europe. The full interview is here.

Sundin: there is a greater acceptance of working from home in Sweden

In its response to covid-19, Sweden has stood out from the crowd. As most European nations enforced strict lockdowns in March, the Swedish government opted for a lighter touch approach, keeping schools, restaurants and borders open while urging people to work from home and practise social distancing in public.

This unconventional approach has divided opinion. Many believe the human cost has been too high. Sweden’s authorities have consistently denied the response was designed to protect the economy. However, it does seem Sweden’s economy weathered the first wave of the pandemic better than some other European countries.

One company that is closely watching Sweden’s economic performance is Brunswick Real Estate. On 1 September, the Stockholm-based property investor and lender held a first close on SKr12 billion (€1.2 billion) for its third real estate debt fund. It is now tasked with deploying the capital in the country in sustainable real estate loans ranging from €40 million to €75 million.

Pontus Sundin, chief executive of Brunswick’s debt division and himself a former property banker with German lender Helaba, says Sweden’s ‘light-touch’ covid response has helped its commercial real estate sector remain relatively resilient to the pandemic.

“We have seen that the impact on retail and hospitality was much harder in other countries where there were stricter measures than in Sweden,” he says. “Even some retail segments, like discount shopping, had an extremely strong second quarter. We have seen a fast recovery rate.”

He explains that conditions for real estate equity and debt investors have improved in the latter part of the year. “After a second quarter, during which the banks and the capital markets were very volatile, the market stabilised in the third quarter.

“The most interesting opportunities, sector-wise, are in residential, where the vacancy rate is zero percent and buildings have long queues of waiting tenants.”

Another part of the market he expects to remain resilient is property occupied by government-backed tenants, including nursing homes, day care centres and elderly care facilities. Sweden, like its Nordic neighbours, has a large public sector. Sundin describes such properties as a “defensive option” for investors and their lenders.

He argues that entrenched working practices in Sweden could bolster the office market against the long-term impact of the pandemic. “The office sector in Stockholm might be less impacted than in London or Paris because in this country there has been historically a wider acceptance from companies of the working-from-home trend.” This, he argues, means Swedish companies are less likely than other European occupiers to need to implement changes to their workplace dynamics.


Bill Sexton, Trimont Real Estate Advisors

In December, alongside sister title PERE, we published an analysis of how loan servicers are dealing with troubled real estate loans in the US and Europe. One of those we interviewed was Bill Sexton, head of servicer Trimont’s European business. The full interview is here.

Sexton: a loan crisis has been delayed in Europe

Sexton says the loan crisis in Europe has been delayed. “Lenders are granting some form of time-limited forbearance, such as waiving loan-to-value and interest coverage ratio covenant tests for an agreed period, typically six to 12 months. In some cases, lenders have agreed to holidays on capital repayments. We are also seeing modifications of loan terms, including amendments to the repayment terms.”

Across Trimont’s European book, around 20 percent of loans have been subject to some form of forbearance. However, he adds: “There comes a point where lenders cannot extend again because the debt burden becomes unmanageable. By Q1, we will start to see issues. By Q2, a year into the pandemic, my instinct is that lenders will be less inclined to extend forbearance.”

He believes the amount of amendments to repayment terms and covenant tests means the true scale of the problem facing Europe’s real estate lenders is impossible to ascertain. “Once a loan is amended, it moves from being sub-performing to being classed as performing again. It’s technically fixed. But that doesn’t mean it is performing as it was originally expected to.

“There comes a point where lenders cannot extend again because the debt burden becomes unmanageable”

Once forbearance ends, he expects lenders to seek consensual resolutions with borrowers on distressed loans. That will involve working with borrowers to inject new equity or accelerating the repayment of loans. It could also mean working collaboratively to find fresh debt, such as completion capital for development schemes.

Enforcement action may be an inevitability for assets in the most troubled parts of the market, he adds. “We will see some lenders take the keys back, and even some borrowers hand the keys back because they do not want to put more equity into a troubled property. We are likely to see shopping centres put on to the market by lenders, probably trading as development sites.”

Another option open to incumbent lenders is to sell troubled loans to opportunistic buyers. “I suspect we will see a similar situation unfold as we did after the GFC. It started out as individual loan sales but ended with large-scale non-performing loan portfolios trading.”