Lenders make the case for UK CRE

UK commercial real estate will remain an attractive prospect for investors despite the ongoing uncertainty in the wider economy, the audience at a panel discussion between property lenders heard last week.

Speaking at a Loan Market Association seminar on the UK CRE finance market in London on 25 January, Natalie Howard, partner with senior debt fund lender AgFe, argued that the market continues to offer relative value to risk-averse investors.

“Real estate continues to attract institutional capital, family office money and corporate wealth,” said Howard, “it’s a relatively straightforward asset class by nature and it isn’t too volatile. Returns are good compared to corporate bonds and gilts, so allocations have gone up in the last five to six years from 4 percent to 12 percent for some investors.

“The UK is still the biggest market for overseas investors. It is transparent, there is a culture of professionalism, it’s a stable country. It’s an attractive place for people to park their wealth,” she added.

Asked if global political and economic factors would make UK CRE more or less of a safe haven, Howard said: “It will be more of a safe haven. Trump getting into power is fantastic for UK real estate, as more global capital will come over here. Also, the UK coming out of Europe is a good thing in the long-term, it will open up doors to us. The negative side is that Europe has a lot of structural change to go through.”

Panellists generally argued that London would retain the majority of its financial services jobs, which many have speculated would move elsewhere due to Brexit.

David Phythian, regional head of real estate, London, at HSBC addressed comments made at the Davos summit days earlier by his bank’s UK chief executive Stuart Gulliver that HSBC will relocate staff responsible for generating around a fifth of its UK-based trading revenue to Paris after Brexit becomes effective.

Phythian explained that HSBC already has a significant presence in Paris and that the announcement by Gulliver was “a contingency to say we may need to upscale our operation in Paris”. Speaking more generally about banks potentially moving staff abroad, Phythian added: “The problem with being too disaggregated is that it leads to potentially disproportionately high costs and dealing with many regulators.”

Lloyds’ global head of CRE lending, John Feeney, agreed “up to a point” that the UK property sector is a safe haven for capital, but warned against complacency: “UK CRE sits within a relative value matrix. Today, London and the UK looks pretty attractive relative to comparable markets such as Milan and Paris, which offer similar cashflows from similar assets. But there is no magic to the UK market. It’s not irreplaceable in an investor’s portfolio and we have to be careful to ensure it remains attractive.”

Another panellist at the LMA event, TH Real Estate’s debt head Christian Janssen, expressed his concerns. “Are CRE investors truly earning enough of a risk premium?” he asked. “Assets are flying off the shelf and some yields are at 4 percent in the City. Does that really make sense? We are likely to see some imported inflation, so although the UK is attractive, valuations are a little high.”

HSBC’s Phythian added: “It feels like the current market is all about yield and dividend. It feels very different to the last cycle; it isn’t debt-fuelled. There’s lot of equity from outside Europe and its here longer-term.”

“Foreign buyers are content to buy 4.5 percent-yielding assets, lowly leveraged, and achieve a sustainable 6 percent dividend yield on their equity,” he added.

On the more limited opportunities for mezzanine debt, senior lender Howard from AgFe said:

“Mezzanine is all about timing. If you invest in a rising market you will get your money back; if you invest at the top of the market you will get squeezed out by the senior and equity in a downturn. There is less demand for mezzanine. Some sponsors ask us for higher leverage and we introduce them to a mezzanine lender, but that is happening less and less.”

“There’s so much equity around and it’s competing with the mezzanine,” added Phythian.