Lenders are facing increased competition to source the right deals at this late stage of the property cycle. While loan margins are under pressure in established markets and sectors, debt providers must remain disciplined and selective to minimise risks. Where, then, can they find the best opportunities?
The latest Emerging Trends in Real Estate Europe report, published jointly by PwC and the Urban Land Institute, which polls industry players’ expectations for 2019, sheds some light in this regard. These are, in our view, the opportunities that stand out in the annual forecast:
1. Europe’s ‘rising star’ cities. There is no doubt London keeps attracting capital from property investors – in fact, the UK’s capital was the most active European real estate market with €20 billion transacted from Q4 2017 to Q3 2018, according to Real Capital Analytics. Investors, however, are also turning their attention to European cities that, while smaller, look likely to remain dynamic. In the report, Lisbon is this year’s choice for investors in terms of overall prospects for investment and development, followed by Berlin and Dublin. Without forgetting their bread-and-butter markets, lenders should expand their reach and keep these secondary cities on their radars. More money is expected to be poured into these locations.
2. Build-to-core strategies. Finding value in established markets is increasingly difficult at this advanced stage of the cycle, with property fully priced in certain markets. In response, the industry is chasing income strategies, and many players are embracing build-to-core deals. This strategy, which involves buying non-core buildings in the best locations and turning them into institutional-standard products, is attracting finance. In March, Allianz Real Estate, a conservative lender, broadened its debt capabilities to allow for an element of development financing of prime buildings alongside its senior strategy. The move allowed the lender to capture additional returns. Roland Fuchs, the firm’s head of debt, said at the time lending margins for prime development loans could command a 50 to 100 basis points premium to senior investment loans.
3. Attractive alternative sectors. Alternative real estate assets are becoming more mainstream, at least in terms of industry sentiment. In 2015, just 28 percent of the survey respondents said they would invest in alternatives. This year, almost 60 percent of respondents are already investing in alternatives, and 66 percent wish to increase their holdings next year. In their search for yield, lenders are following suit – seeking greater exposure to operating assets. In September, French bank Société Générale closed a €655 million financing of a portfolio of 71 clinics from which Berlin-based operator Median provides post-acute care to paying patients. The facility carried a swapped fixed rate of 2.3 percent, which compares with typical margins for office investment at 1 percent, according to CBRE’s Debt Map data.
4. Demand for housing. Prospects for private rented residential rank high in real estate players’ minds, given the pricing and availability of sustainable core assets, surveyed investors said. Additionally, demand for rental accommodation will be supported by long-term demographic trends and capital will continue to be deployed into the sector. Investors and lenders alike should not ignore markets such as Spain, which have recovered from their real estate slumps and where the residential market has experienced a revival, with construction of new residential units up by 21 percent year-on-year and housing prices expected to grow around 10 percent in cities such as Madrid, Valencia or Malaga, according to CBRE. A margin premium can also attract lenders to the Spanish market: debt for residential developments typically ranges from 250bps to 300bps, which compares with margins of around 150bps in the office space.
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