CREFC: Economic optimism filters through to property debt specialists’ moods

Latest survey by the Commercial Real Estate Finance Council Europe points to improvement in industry sentiment during Q2.


The results of the Q2 sentiment survey conducted between 26 March and 13 April by the Commercial Real Estate Finance Council Europe reveal a sunnier mood among its property debt-focused members than during the previous quarter.

CREFC’s leaders cited the roll-out of covid-19 vaccines, particularly in the UK, and brighter economic forecasts as the likely drivers of improved sentiment.

To better chart the change in sentiment since the survey was launched in Q1 2019, CREFC introduced a sentiment index, which it applied to the results of its survey.

Typically, each survey question requires respondents to tick one of five boxes, ranging from ‘significantly negative’ to ‘significantly positive’. To calculate the sentiment index, CREFC subtracted negative responses from positive ones, with neutral responses excluded and ‘significantly’ negative or positive responses counted twice.

The index ranges from -2 if all respondents are significantly negative to 2 if all are significantly positive, and provides a single metric that encapsulates overall sentiment and can be tracked across quarterly surveys.

Real Estate Capital caught up with David Dahan, CREFC Europe’s industry initiatives director, to discuss the main findings of the survey and how sentiment has shifted from the preceding quarters.

Higher hopes for the economy

Although sentiment is coming from a low base after more than a year of uncertainty, Dahan says the survey results and supplementary comments by respondents clearly indicate an improved mood.

“In the last three quarters, sentiment was largely negative, so the results of this survey show a shift,” he says. “In both the UK and the rest of Europe, the sentiment index reached a peak in optimism since the survey started, with the UK at a score of 0.84 and the rest of Europe at 0.47.”

Dahan believes survey participants were buoyed by economic forecasts that point to a speedier economic recovery than had been expected in late 2020 – including by the International Monetary Fund, which forecast a 6 percent global growth projection for 2021.

“Participants reacted positively to the evolving economic conditions, supported by continued fiscal stimulus in a few large economies, vaccination-induced recovery and unusually high levels of household savings,” he says.

Liquidity – but not everywhere

He adds that the positive shift in opinion on overall market conditions was underpinned by respondents’ belief that the European real estate debt market is fundamentally liquid: “Views on debt availability and liquidity of capital – the most closely related factor to views on overall conditions – continued to trend upwards, and reached a peak.”

However, liquidity is not benefitting all parts of the market equally.

“The qualitative comments in the survey show polarisation. There is plenty of finance available for popular sectors and the best assets, but the more challenged sectors and assets, such as retail and non-prime offices, are less liquid.”

Better property fundamentals

Despite the continued challenges for landlords collecting rent and for lenders collecting interest payments, survey participants were more optimistic than in previous quarters about property market fundamentals.

“The level of optimism for real estate extended across almost all sectors,” says Dahan. “Whilst opinion is still negative about retail, even for this sector, views were at an all-time high for the past 10 quarters. There is pent-up consumer demand, which should benefit retail, as well as hospitality, in the second half of the year.”

Among the sectors most impacted by covid, there seemed to be a more optimistic shift in views for hospitality and student accommodation, with both reaching their peak in more than two years of data.

Office uncertainty

In a clearly polarised market, the sentiment towards offices remains divided.

“There is still clearly some level of uncertainty about the office sector,” says Dahan. “Whilst views on the sector have improved, there are still enough detractors to pull the sentiment index down.”

Although 40 percent of respondents were more optimistic, 30 percent were more pessimistic. “It is the most polarised of all the sectors. A lot of dust needs to settle before people feel more positive about offices.”

How respondents feel about the market

“As market values are adjusted and realised, there is likely to be more opportunity to finance at higher rates, especially since banks seem to be retrenching”

“Lenders and borrowers are still working together consensually: there are not many signs of marked distress”

“Trophy assets and industrial are very strongly bid – both equity and debt. Elsewhere, it is much more challenging”