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Five signs of a liquid debt market

In the face of headwinds including Brexit, rate rises and high street woes, these trends show there is still a strong appetite to provide debt.

European real estate finance markets have remained busy so far this summer, suggesting the usual August slowdown will be brief. However, with many in the industry taking a well-earned break, it is worth taking stock of the trends that have shaped 2018 so far. Here are five of them:

1. CMBS is back, though pricing is widening. The revival of securitisation first seen last November appears not to be a blip. Banks have continued to issue new deals this summer and 2018 is expected to outstrip the low issuance seen in the past few years. The revival of Europe’s CMBS market benefited from tightening pricing, with 75 basis points seen in early July. The two latest deals, however, have reflected widening spreads in part due to a higher supply of paper in the structured finance market. Although CMBS have become an avenue to liquidity again, issuers need to closely monitor trends across the asset-backed securities market to best ascertain its health.

2. Brexit risk is growing, but the UK is holding up. Despite the increased likelihood of a no-deal Brexit, the UK has continued to attract finance for large real estate deals. Lenders are showing faith in London and the regions, as illustrated by Allianz and Brookfield’s August financing of St Katharine Docks in London, understood to be around £300 million (€335 million), and Barings’ £200 million refinancing of Milton Park in Oxfordshire. Despite suggestions Asian investor demand has cooled, they continue to pump money into a market they regard a safe haven for long-term investment. If, however, a no-deal Brexit becomes apparent by year-end, the Bank of England may react by further raising interest rates, which could adversely affect the UK market.

3. Lenders want more value-add. Debt providers are increasingly backing transitional or value-add assets, to capture higher returns than those provided by plain vanilla debt. Competition for low-risk deals has driven margins down across Europe, with prime properties in key markets such as France and Germany providing as low as 1 percent margins on average, according to CBRE’s Q1 2018 debt map. Finding an element of enhanced risk and return, while sticking to core lending principles will be the challenge for many.

4. Retail is down but not out. Traditional high street retail models, especially in the UK, are under intense pressure. Investment in retail dropped 47 percent to £1.4 billion in the first quarter of 2018, according to Cushman & Wakefield data. However, lenders will back the sector where they see genuine growth potential. In July, pbb Deutsche Pfandbriefbank financed the Korean buyer of the Gallagher retail park, near Birmingham, with a £107 million loan. The park had been subject to repositioning, with further rental growth targeted. Underserved European markets are also on lenders’ radars. Also in July, Lar España sourced €98.5 million from local banks for the construction of a shopping centre in Seville.

5. Fundraising is still booming. Investors looking to accrue exposure to property in the late cycle are favouring real estate debt funds, as they provide investments which produce regular income, along with the borrower’s equity cushion. Fundraising for Europe-focused real estate debt vehicles totalled $3.3 billion in H1 2018, up from $1.74 billion over the same period last year, according to Real Estate Capital data. Despite the sudden rush to raise capital for debt, only a small number of vehicles have the track record to successfully make loans, so capital piling into the strategy could be a cause of concern.

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