ING on how life sciences hits the sweet spot

This article is sponsored by ING.

The past three pandemic years have shone a spotlight on the life sciences sector, with Dutch bank ING crowned our Lender of the Year: Benelux. Head of real estate finance for Benelux, Arie Hubers, and head of real estate for Belgium, Pierre Devlaminck, discuss the attraction of the asset class and how the sector has performed in the face of recent market uncertainty.

How was the Benelux real estate market impacted by 2022’s economic volatility?

Arie Hubers: The impact was similar to other regions. There was a lot of supply-chain disruption caused by the war in Ukraine and the ongoing economic recovery from covid, which triggered inflation. The central banks were a bit slow to react to that, thinking it was a temporary effect, before acting more aggressively over the course of the year.

The main interest rate benchmark for real estate is the five-year euro swap, which went up to approximately 300 basis points. That has caused a lot of uncertainty in the market.

We saw decent dealflow over the first half of the year because firms were well advanced in talks. Once it became clear that interest rates were going to be elevated for a sustained period of time, dealflow started to decline. Investors wanted to review their position on what was the right selling and buying price, and not a lot of deals reached that equilibrium.

There is still uncertainty today but slowly people are beginning to adapt to the higher rates of interest and there is a bit of a reset in the market. Once buyers and sellers reach common ground on the long-term picture, or at least the medium term, trade will pick up.

I do think those buyers that have more access to capital – and specifically equity – will be in a more advantageous position because debt has become more expensive. If you are competing as a full equity buyer with those that are dependent on leverage, you are much better placed now than 12 months ago.

How have lending terms and liquidity been affected?

AH: On the lending side, firms have been a little in the dark about how low valuations would fall because of higher interest rates. People want very up-to-date valuations but, even then, have been cautious because there were fewer recent transactions to compare with. We see that lenders are also more cautious about the loan-to-value ratio and there is a lot of focus on assessing sensitivity to interest rate costs.

Compared to the previous crisis, it was not as heavy as in 2008-09. But there is less liquidity, and lenders are more reliant on capital market funding. They are also facing tight conditions and are less active in the market. There is less liquidity, but it is not too dramatic.

How is the lending market changing in Benelux in terms of the profile of lenders?

Pierre Devlaminck: Some lenders over the last year financed based on very aggressive pricing without covenants, or with limited covenants, and with very high leverage. We have not seen those types of players at all since September last year, and we are seeing a lot of clients come back to traditional real estate banks such as ourselves. We focus on maintaining long-term relationships with our clients. We finance the full value chain in real estate and all types of investors, from individual to international institutional investors, and we have an approach through the cycle.

A key deal in August was your loan to refinance a portfolio of life sciences assets in the Netherlands. Why is the life sciences sector particularly attractive to you?

AH: We track sector developments and market dynamics closely to adapt to changing markets and tailor appropriate solutions for our client relationships. We like to build lending relationships in different environments and started looking into the asset class several years ago when we spotted some of our clients in the US moving into it.

For the life sciences transaction we leveraged ING’s product capabilities, our real estate sector expertise and geographical footprint in order to enter into a strategic relationship with the client. We did a smaller transaction for the client in Belgium first and then supported them in the Netherlands with one of the largest lending life science transactions in Europe so far.

We see life sciences as a long term-trend and see a lot of capital flowing into life sciences on the back of demographic developments in Europe. There is a need for more innovation and advancements in healthcare. There is also an ageing population, which is a big driver for the sector.

Another element in life sciences is that working from home is not an option, as you have to go to the lab or office. That makes the subsector more resilient and less cyclical, plus it is a growing and maturing asset class where we are already seeing a lot of appetite from clients.

Where do you see the largest opportunities in the Benelux market?

PD: If you look at the fundamentals of the Benelux economy, it is strategically located in Western Europe with two major ports at Antwerp and Rotterdam. The logistics asset class has experienced a big boom. The region also benefits from a lot of European headquarters and administrative centres, so office is well supported, while the high average GDP per capita means there is a lot of demand for residential, senior housing and student accommodation.

Another opportunity is transition financing as the industry demands more CO2-neutral buildings. That is something ING started several years ago, and we want to support the energy transition. Our sustainability strategy enables us to steer our portfolio towards greater climate alignment, ensuring we are best placed to combat the impact of climate change on our commercial real estate portfolio.

AH: Climate change is both a threat and an opportunity. We are committed to helping our clients finance the decarbonisation that is needed across existing real estate stock. That means making the sector more energy efficient and sustainable. The threat is that assets could become stranded without sufficient capex spent over the next five to 10 years.

What are the main headwinds that could impact the region?

PD: Lack of liquidity is a big threat. For example, some lenders might withdraw from an asset class such as offices because some buildings might be obsolete from an ESG standpoint. That is why we favour portfolio diversification. We support several REITs that are very diversified in terms of asset and country mix.

AH: There is scrutiny from lenders on cashflow and interest cover. We will also become more vigilant on refinancing because some of our clients have not had the benefit of higher inflation elevating their rental income.

If they refinance now, they might have to contend with higher interest rates when they have not had the benefits of increasing rental income, making refinancing more difficult. That is an attention point for us.

The opposite is also true. We have clients that have hedged their interest rate position for the long-term and now benefit from indexation on the back of inflation. It is very client dependent.