The threat of covid-19 is a long way from dissipating for those in the business of financing commercial real estate. Europe has emerged from strict lockdowns. But signs of a second wave of the pandemic, and the threat of a fresh tightening of restrictions, make underwriting future property performance an unenviable task.
The continent’s economic prospects remain highly uncertain, with economists unable to agree whether the recovery will resemble a V, a U or an L. Although many in the property sector have expressed their views, no one really knows when hotel guests will return or how office occupiers will rethink their space needs.
When Europe went into lockdown, lenders either paused, proceeded with extreme caution or went on the hunt for opportunities. The lending market did not entirely grind to a halt. But many focused on working with borrowers that have come under stress.
However, as Europe’s real estate market gradually becomes more active, debt providers are increasingly eager to deploy capital. Some lenders will undoubtedly remain on the sidelines or become highly selective. But some bankers have targets to meet by year-end and debt fund managers have returns to deliver.
The cover story of our autumn edition, which will be published on 1 September, examines the five crucial questions lenders need to ask themselves before they commit to writing new loans. This Deep Dive will also be serialised over five days, starting on Monday 24 August.
We spoke to several lenders – from banks and alternative lending organisations – as well as other parties in the thick of financing deals: borrowers, valuers, lawyers. We found out what they are thinking. From there, we identified five key questions lenders need to ask themselves to ensure robust underwriting during this pandemic:
- How well do I know my sponsor?
- Will the borrower’s tenant keep paying its rent?
- Should I add protective mechanisms to the deal structure?
- What do I believe the underlying real estate is worth?
- Do I want to make this loan now?
Our main finding was that lenders are taking more time to scrutinise the fundamentals of prospective financing deals. They are questioning how well capitalised the sponsor is, and what sort of track record it has. They are doing more homework on the tenant’s ability to generate income. They are insisting on features such as interest reserve measures. And they are probing comparative valuations to assess as best they can the worth of the underlying bricks and mortar.
Ultimately, they are asking: does it make sense to do this deal now? Lending decisions made today will have a huge bearing on the health of lenders’ businesses in the coming years. A renewed focus on core lending principles is crucial.
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