Brexit vote forces reassessment of CRE finance risk

UK real estate finance market players have reacted to the country’s historic vote to leave the EU with a mixture of shock and bewilderment, but also resolve. Outwardly, many in the overwhelmingly pro-EU industry have expressed a ‘keep calm and carry on’ message in the face of the inevitable economic uncertainty which has gripped the […]

UK real estate finance market players have reacted to the country’s historic vote to leave the EU with a mixture of shock and bewilderment, but also resolve.

2d7c08db-9d87-43ce-921f-513acca86f7e-2060x1236Outwardly, many in the overwhelmingly pro-EU industry have expressed a ‘keep calm and carry on’ message in the face of the inevitable economic uncertainty which has gripped the country. However, behind the scenes the UK’s decision has led to them taking stock.

One London-based banker from a foreign-headquartered organisation said this morning there would be no knee-jerk reaction regarding his bank’s policy on writing loans in the UK. There would, however, be a “slight pause” as the team assess the situation into next week. Term sheets of ongoing deals would be freshly scrutinised to ensure that risk parameters were not being breached. If not, deals would go ahead as planned.

Another banker expressed the view that the referendum was a long-anticipated event and banks had stress-tested the impact of a Brexit on their lending, meaning that there will not be a sudden shock. “This is not 2008,” the banker said.

One question facing the UK lending market now is whether a risk-premium will be added into loan pricing as a result of the ‘leave’ vote. Overseas banks’ risk models incorporate the UK’s country rating, which if downgraded would presumably be priced into deals, one source said. Domestic banks also incorporate assumptions about the UK economy’s performance into their lending models, a practice now made more difficult.

Furthermore, the drop in the value of sterling will make lending here more expensive for banks which have to swap euros into pounds. This could make it an uncompetitive market for them to operate in.

“We have advised on deals which have closed in recent days despite the volatility, and lenders have honoured their pricing commitments,” said Alexandra Lanni, head of transactions for debt advisory firm Laxfield Capital.

“We are advising on a number of ongoing deals,” she added. “On one transaction in particular, the lender has indicated that it will be business as usual because the deal and the pricing are credit-committee approved.”

The real estate investment market and consequently the financing market has been relatively quiet this year, in large part due to anticipation of the referendum. It means that many lenders who concentrate a large proportion of their business on the UK market will have originated volumes significantly below target. Many have a continued impetus to put money to work in lending deals, but it is fanciful to expect that lenders will recover too much of the ground lost in the first six months of 2016.

“From a domestic lender’s perspective, we expect high-street lenders to reassess their lending terms considering how funding costs adjust in the medium to long term. This will also create opportunities for specialist banks that are able to react quickly to the new status quo,” said Mark Bladon of Investec Structured Property Finance.

“We have been working on a number of deals, across several use classes, ranging from student accommodation to residential development, which we expect to take forward now that a decision has been made,” he added.

If the impact of the vote pushes costs up for banks and forces pricing wider, circumstances could favour alternative lenders which have a higher appetite for risk. One debt fund manager admitted to expecting calls from potential borrowers to fund live deals which have been arranged with banks, but which banks are unable to execute.

The increasingly diverse make-up of the UK CRE lending market in recent years will stand the sector in good stead, Laxfield’s Lanni said: “The UK debt market is very stratified.”

The silver cloud, some insist, is the potential for increased opportunistic investor demand on the back of a weaker pound. “In the short-term, while there may be an impact on decision-making and activity levels, we also expect to see an increase in interest from foreign investors if sterling devalues to the extent many have predicted,” said Urban Exposure CEO, Randeesh Sandhu.

“The decision to leave the EU may create some short term volatility and cause some investors to put decisions on hold. But we saw during the referendum campaign that this created buying opportunities at significant discounts for savvy investors,” added Manish Chande, senior partner at Clearbell.

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