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ING: Southern Europe exceeds expectations

Gabriele Peroni, head of real estate finance, Italy, and Julián Bravo, head of real estate finance, Spain and Portugal at ING, winner of Bank Lender of the Year: Southern Europe, discuss lending conditions in the region.

This article is sponsored by ING.

What were your biggest milestones in the Southern Europe region in 2021?

Gabriele Peroni
Gabriele Peroni

Gabriele Peroni: In Italy, 2021 turned out to be better than expected. Investment activity picked up compared to the previous year, and we successfully positioned ourselves early in the year for financing and refinancing transactions in the Italian market. For example, we were selected by Hines and BVK for the refinancing of Cordusio 2.0, their landmark office and retail property in Milan in July.

The team also made efforts to help our clients reach their sustainability targets within the green advisory roles we were able to secure. The green term loan we advised on for COIMA RES, in line with the EU Taxonomy, is one of the first examples of such a deal in Italy. This is an achievement we hope to replicate for our clients throughout 2022.

Julian Bravo
Julián Bravo

Julián Bravo: In a boost to ING’s Spain division, we ranked as the largest participant in syndicated real estate loans by volume in 2021 according to financial markets platform Dealogic, which is a milestone we are very proud to have achieved. We also financed one of the most significant transactions for the Spanish market last year. We played a leading role as bookrunner in the acquisition financing of Montepino, a logistics developer and asset manager in Spain for €470 million in June 2021. This was the largest logistics transaction in the country, and one of the largest in Europe.

How were Southern European lending markets impacted by the pandemic last year?

GP: In the Italian market, investment activity was affected, although transactions didn’t come to a complete halt as investors quickly adapted to shift their investment criteria towards a more ‘covid-proof’ type of investment, which has characterised the market in 2021.

A prime example is the logistics sector. It registered record low yields last year, and there was growth in subsectors such as last-mile and cold storage logistics, which attracted more investors towards the sector.

The residential sector has also been thriving in challenging times. We are seeing an acceleration of investment in the private rented sector and student housing, which are relatively new asset classes for Italy. Generally, retail and certain types of office investments have been impacted the most. There are exceptions, however, with retail parks continuing to perform strongly.

JB: Investment, and therefore the debt market, is no longer being suppressed by the pandemic. We have recorded a high volume of investments in the Spain and Portugal regions in 2021. There is still a lot of appetite in real estate which is very positive for finance providers.

How have lending terms changed in the Southern European market?

GP: At ING we have always been a core/core-plus financier in Italy, therefore we have only slightly adjusted our lending terms. We have had to be more selective in the office sector, where the focus is on class A properties that meet all modern standards. This means we focus on office properties that are centrally located in cities, such as Milan or Rome, and favour deals in which the loan-to-value is in the region of 50 percent. In this sector, we prefer long-let and stable cashflow generating properties.

JB: There is still a lot of capital to invest in Southern Europe. We are seeing lower yields and this investment pressure means more competition in the lending market with downward margins for the core product.

Where are borrowers most active?

GP: The three most active countries are Spain, Italy and Portugal. In Italy, we expect our clients to be mainly focused on the logistics and residential sectors, including some alternative asset classes, such as student housing.

“Investment, and therefore the debt market, is no longer being suppressed by the pandemic”

Julián Bravo

JB: We are seeing a high level of investment in Spain and Portugal as these countries are offering investors an attractive return for the risk that they take on. Like Gabriele, we are seeing far greater interest in logistics and the private rented sector in Spain and Portugal. A lack of product and the drop in returns due to the large liquidity available, means investors are increasingly focused on logistics developments and build-to-rent.

What is your outlook for 2022?

GP: The outlook for the Italian market is generally positive. The economy has recovered quickly and, under the leadership of prime minister Mario Draghi [formerly president of the European Central Bank], selected infrastructure investments will finally happen, reducing the gap with other countries. These factors will also have a positive effect for real estate investments in 2022. On the other hand, increasing inflation and potential for interest rate rises will require monitoring, as these factors have the potential to negatively impact investments and a full recovery of the economy.

JB: We are having a very positive start of the year. We have identified a pipeline of around €500 million of financing mandates for Spain and Portugal. We hope to outperform our 2021 volumes this year.

What is your outlook for the next five years?

JB & GP: Investment volumes in the real estate sector will depend on the evolution of interest rates. If they remain low as they did in 2021, then real estate will continue to be a focus for institutional clients due to the return and security offered by the sector. If rates rise, the level of investment will be slightly reduced.