Beds, shops and the climate will occupy lenders’ thoughts in 2020

Lending against income-producing residential assets, retail repurposing, and greater scrutiny on sustainable finance will be important topics for Europe’s property lenders this year.

Barring a major shock, European real estate appears on course for another strong year in 2020. Interest rates look set to remain low and global capital will continue to seek a haven in hard assets. Although the market should remain buoyant, debt providers need to get to grips with an industry that is entering the new decade in a state of change. Here are three trends we think will define Europe’s real estate debt markets in 2020.

1. Residential will be a key plank of loan portfolios. Property investors’ search for income-producing assets will continue in 2020. The residential sector, including build-to-rent apartments, senior living and student housing, offers long-term income streams, prospects for rental growth, and the benefit of changing demographic trends. In Q3 2019, investment in European residential went up by 61 percent year-on-year to €15.8 billion, according to CBRE data. In the not-too-distant past, lenders considered such property to be ‘alternative’. In 2020, more lenders will make the ‘beds’ and operational sectors a core part of their portfolios. Meanwhile, it will not be a surprise to see some debt fund managers raising capital to lend specifically in this space. This was what investment manager Chenavari did last year with the launch of its £350 million (€411.7 million) beds-oriented debt fund, which focused primarily on the private rented sector and student accommodation assets in Spain and the UK.

2. Solutions will be sought for obsolete or underperforming retail. The pain in the sector is not over for lenders, and many will spend 2020 dealing with defaults on retail property loans. However, 2020 could also be the year that opportunistic investors decide retail has bottomed out and make a play for the better-performing assets, thus creating new financing opportunities. Landlords of brick-and-mortar retail will also begin to take on the challenge of repurposing their space through a fresh mix of uses. Many lenders still see more downside than upside in knocking down and replacing obsolete retail. However, some lenders are likely to support those landlords that can provide fresh thinking about physical retail space. If properly priced, such projects could present attractive value-add opportunities.

3. Lenders will act to avoid being left behind on sustainability. During 2020, landlords will provide more capital expenditure for older buildings to improve environmental and energy-efficiency standards, thus ensuring they can be marketed to the widest possible tenant base. The public outcry over the effects of climate change during 2019 means the issue is no longer one to which equity investors can simply pay lip service, and net-zero carbon strategies are now seen as essential. Recent green financing initiatives in the property debt space suggest times are changing for lenders too. In 2019, we saw banks including Crédit Agricole and ING provide sustainability-linked financings, while Nordic non-bank lender Brunswick launched a sustainable lending strategy. In 2020, more lenders will introduce debt products that materially reward sustainability through discounted margins. Lenders will also face greater pressure to have a clear policy of only financing assets that meet industry standards.

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