The mood of the European property finance market was tested this week on London’s Pall Mall, as Real Estate Capital held our third Finance Forum: Europe. Professionals from an array of organisations joined us in the Georgian splendour of the Institute of Directors to discuss the big questions facing the industry.
Generally, the mood was cautious. A recurring theme during the day-and-a-half event was that banks have dialled back their risk appetites, with loan-to-value ratios down and margins up. Bankers, it seems, are having a good, hard look at what they are prepared to finance in today’s market.
An interlinked subject which was also frequently raised was the role of so-called alternative lenders in today’s European real estate finance market. There were suggestions that non-banks are now picking up the slack from ‘risk-off’ banks in the post-Brexit market. In more general terms though, conference participants painted a picture of a market in which credit with varying leverage cut-offs, tenors and margins is available from a variety of established market players.
One of those providers, DRC Capital’s Dale Lattanzio, said that alternative capital will play a permanent role. “The US won’t be an exact template, as we won’t have the same level of capital markets activity here, but banks will end up as 40-50 percent of the market and the rest will be insurers, etc.”
As well as independent debt funds, major institutional investors have bulked up their real estate lending operations and insist they are here to stay. Barry Fowler from the investment management arm of UK insurer Aviva said on one panel: “We’re operating in an environment where the regulatory cost of capital has risen more for banks than it has for insurers; it’s created opportunities.”
When non-banks entered Europe’s property finance space in circa 2010/2011, they were viewed by some with a degree of scepticism. They’re setting up shop to take advantage of the vacuum while banks get back on their feet, went the refrain, but will they stick around once the sector’s traditional bankers are back to full strength?
The cycle has yet to run its course, so non-bank lenders are yet to prove that they will stick around long enough to refinance their original crop of loans against a backdrop of changed market conditions, as relationship-oriented bankers pride themselves on doing.
However, non-bank lenders argue that they have enough of a track record now to show they are long-term fixtures of the market. “Debt funds like us have now gone through several capital raises, so we are established,” Dan Pottorff of LaSalle Investment Management said during one panel discussion. “Investors are a lot more comfortable with that product.”
Of course, the ‘alternative lenders’ tag covers a broad church of organisations and some are more committed to the market than others. While some non-banks are established insurance firms with well-staffed real estate lending teams, others are hedge funds which dip in and out of the space as global relative value dictates.
Our annual list of the Top 40 European Lenders, published in the October edition, demonstrates the degree to which alternative financiers are sitting alongside their more traditional counterparts. For those that haven’t read it yet, 15 of them aren’t banks.
Putting forward the view from a traditional bank, Lloyds’ John Feeney gave his perspective: “Diversification of the market can be a little bit overstated. Much of the shift is from UK lenders to overseas banks. Foreign banks such as Middle Eastern and Asian lenders have taken much slack, a lot through the syndication market. It continues to be a largely bank dominated market.”
The latest De Montfort report showed that during 2015, UK banks and building societies were responsible for 34 percent of 2015’s loan origination secured by UK properties, with insurers originating 16 percent and “other non-bank lenders” 9 percent.
Banks still hold sway, but non-banks don’t seem so alternative any more.