Every MIPIM has its icebreaker topic, used during the small-talk stage of meetings. This year, delegates at the annual property fair in Cannes swapped stories of their descents to the French Riviera, as stormy conditions caused by the mistral forced pilots to make several attempts to land or divert for calmer climes.
A bumpy landing, however, is not expected for this real estate cycle. The mood among debt people at MIPIM was generally positive. European real estate, they argued, remains in demand from global investors, interest rates look likely to remain lower for even longer, and the flow of capital into debt strategies continues.
Figures announced during the event by Cushman & Wakefield showed global volumes reached a record $1.75 trillion last year, with the firm forecasting a repeat in 2019. The EMEA region figures hinted that the cycle has peaked, with an almost 11 percent drop, albeit to a still impressive $331 billion tally, with a 2.5 percent increase expected this year.
Given continued demand for investment in real estate, it was unsurprising to hear lenders at MIPIM reaffirm their commitment to the sector. However, debt professionals in attendance demonstrated a growing awareness of the external risks and market challenges to be considered in 2019. Here are some of the talking points.
1. Brexit is getting real, but responses were mixed: In a week punctuated by news from London regarding the course of Brexit, UK-based delegates were keen to share thoughts, while many continental Europe-based lenders played it down as a concern. There is no doubt falling equity investment in the UK has frustrated those looking for deals to finance, and some lenders – particularly German banks – are clearly applying lots of caution. However, some cited the possibility of a post-Brexit price correction as an opportunity from both the equity and debt side. The UK’s chaotic exit from the EU remains a defining challenge for the sector.
2. The European elections could exacerbate political risk: Brexit is not the only political concern. Many at the event expressed concern about the possibility of a populist surge in May’s European Parliament elections, which could add to the mood of political uncertainty across Europe.
3. The European growth story is less convincing: While lenders this cycle do not have concerns about overdevelopment across European cities, and while occupational demand remains strong across many sectors, a big change from last year’s MIPIM was growth prospects across the eurozone. With European Commission growth forecasts for this year slashed, some lenders admitted it is harder to buy into rental growth projections, meaning a weaker case to support the market’s higher prices.
4. The next wave of banking regulation is getting closer: Although it has been like a slow train coming, Basel IV regulation is looming for bankers. Banks are working to ensure their businesses remain robust, ahead of the phasing-in period commencing in 2022. For example, one banker discussed efforts to refine its syndication model by bringing in regular non-bank partners. With banks heavily dominating continental European markets, alternative lenders see opportunity.
5. Asset and borrower selection are crucial: Depending on risk appetite, Europe remains a place of great opportunity for lenders, many argued. Several cited the merits of geographical expansion into less mature markets and the opportunity for development finance. However, a regular refrain was that careful selection of assets – and sponsors – is crucial. Retail, for example, needs to be treated with caution. Picking the right investment manager is also critical; in a highly priced market, which is overdue a correction, only those sponsors and properties which stand the best chance of weathering a downturn should be granted finance.
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