CREFC Europe’s Q4 survey reveals a more risk-averse industry

Responses to the Q4 edition of the Commercial Real Estate Finance Council Europe’s sentiment survey show property debt professionals are taking an increasingly cautious approach, with concerns about the political backdrop and late-cycle market conditions at the front of their minds.

The survey was conducted between 23 September and 14 October. With 56 percent of respondents coming from UK-headquartered firms, it is perhaps unsurprising that political concerns were voiced: the survey took place during Prime Minister Boris Johnson’s ultimately failed attempt to extract the UK from the EU by the end of October.

Although respondents are being cautious, given the late stage of the cycle, many reported generally unchanged market conditions since the last time the survey was conducted, between 28 June and 22 July. However, many respondents remain worried about retail, with more than 30 percent saying they are “significantly pessimistic”.

The anonymous survey is sent to up to three relevant contacts at each firm in CREFC Europe’s membership. CREFC Europe believes that respondents for the latest quarterly survey account for an aggregated commercial real estate loan book of more than £155 billion (€180 billion).

Concerns about offices grow, while retail remains unpopular

Expert analysis by David Dahan, industry initiatives director at CREFC Europe

We conducted our Q4 2019 market sentiment survey during a period overshadowed by Brexit uncertainty in the UK and a showdown between the country’s prime minister and parliament.

Some 82 percent of respondents indicated their belief that the political environment had worsened when compared with the previous quarter. Almost 30 percent believed it was “significantly worse”, which is the highest level since Q1.

At the same time, there were slight improvements in sentiment towards the economic landscape compared with Q2 and Q3. Fortunately, the regulatory environment appears to remain stable.

The survey results show a persistent divergence in opinion on market conditions in the UK and continental Europe, though sentiment towards both had deteriorated slightly since Q3.

Although respondents continue to hold moderately negative views about real estate fundamentals, the range of views on conditions in the market reflects the diversity of its participants. While around half of respondents reported no change, the rest were fairly evenly divided between those who saw an improvement and those who saw a deterioration in liquidity, margins and lending terms. Depending on the market segment, there are specific opportunities and challenges. For instance, a greater proportion of respondents from commercial banks than from alternative lenders believed margins and lending terms were improving.

Sentiment towards individual property sectors was largely unchanged, with one significant exception: the uptick in the number of participants who were more pessimistic about offices. It is too early to say whether this was influenced by WeWork’s failed initial public offering.

Negativity about retail continues. Only one person was moderately optimistic about the sector during a quarter when the proportion of respondents who were significantly pessimistic reached a third for the first time this year.

With respect to unearthing attractive risk-adjusted returns, responses pointed to a trend for targeting less risky assets and lending strategies. In particular, there seemed to be a retrenchment towards the prime end of the market. This perhaps reflects market conditions and points to late-cycle dynamics.