Catching up with one German banker at the EXPO Real property fair in Munich this week, talk turned to how difficult it is to find a good builder or electrician in the country, such is the demand for their services in a booming economy.
The segue in conversation followed the banker’s explanation that commercial real estate lenders in Germany are frustrated by a lack of capacity among contractors to take on large-scale development projects. Due to a lack of suitable supply, investors in core property are opting to build what they want.
However, one concern plaguing those financing them is potentially losing a pre-let tenant because a contractor cannot be employed in time.
The increase in development is symptomatic of the unrelenting demand for European real estate; a recurrent topic at EXPO. European property continues to satisfy global investors’ thirst for yield and there are no immediate signs of that changing, despite the market being almost a decade into its cycle.
As well as resorting to development, those investors able to take on a little more risk are pushing into those countries and sectors in which further growth is expected, be that private rented residential in Dublin, student accommodation in Spain, or Dutch houses.
Lenders are following suit. Liquidity for development or investment in Europe’s growth spots has increased, largely through alternative debt providers, but also some banks. Around 18 months ago, one visitor to Munich remarked, you would struggle to borrow 65 percent loan-to-value debt in the Netherlands; today, you’d be spoilt for choice.
EXPO, with thousands of property players packed into exhibition halls, all trying to make sense of Europe’s markets, is an apt metaphor for where we are in the cycle. While everyone has one eye on interest rates and political uncertainty, property continues to deliver the yields investors crave – relative to other investments, at least – and lending strategies reflect that. “If you don’t make money now, you never will,” one debt advisor recalled hearing a property peer say.
However, now is the time for debt providers to keep their wits about them. Research unveiled last week by the UK’s Property Industry Alliance highlighted how lenders typically wipe out any profits made from real estate lending through mistakes made at the end of a cycle.
Europe’s real estate lenders have been cautious players in this property cycle, but just as huge volumes of equity are being deployed, so is a large amount of debt – from banks and alternative lenders. The longer the cycle goes on, the more risk investors will need to take to gain access to European property – either by paying high prices for core or finding riskier routes into the sector. Debt providers should continually ask themselves how far they want to follow them.
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