Lenders should look beyond property’s shifting mainstream

During 2021, equity capital will be diverted from offices and shops to beds and sheds, creating demand for debt finance. But lenders should not overlook opportunities elsewhere.


In a review of its 2020 activities published last week, Savills Investment Management described how it spent the year rebalancing its portfolio towards ‘recession-resilient’ parts of the real estate market.

That included growing its European logistics platform to an asset value of €4.7 billion and launching new pan-European funds dedicated to sheds and food retail. According to Kiran Patel, the manager’s global chief investment officer and deputy global chief executive, if investors can see through the short-term effects of the pandemic, they can leverage long-term themes to their advantage.

Other managers are thinking that way too. The shifting of capital from offices and retail into residential, logistics and, to a lesser extent, niche sectors expected to benefit from structural tailwinds will be a defining trend of 2021.

In a client report published last week, another manager, LaSalle Investment Management, said the rebalancing would be most acute in Europe. It pointed to MSCI data that show offices and retail still account for around 72 percent of core portfolios in Europe, compared with 49 percent in the US.

The debate about the future of the office will continue to rage. Many will argue that the traditional workplace will remain a pivotal component of property owners’ portfolios. However, as managers seek to deploy capital in 2021, and with the structure of a post-covid market still difficult to envisage, the defensive beds and sheds sectors – and, to a degree the ‘meds’ sector, the new term for life science offices – will increasingly look like real estate’s mainstream markets.

As equity investors seek exposure to these segments, there will be opportunities for lenders to support them. According to our sources, most real estate debt providers are treading carefully in the current market conditions. Plenty of capital has been raised for debt strategies ranging from senior loans to special situations lending. But credit providers are expected to deploy it against quality properties in the best locations and in defensive sectors. It makes sense that they will seek to back those sponsors aiming to construct future-proofed portfolios.

Yet although residential and logistics will provide lenders with plenty of business in 2021 and beyond, it makes sense to also look at the more supposedly niche areas of the market, which also look resilient in the face of the pandemic. These include data centres and healthcare properties. Many lenders have limited underwriting experience against such property sectors, but those willing to explore them will find solid lending opportunities and less competition than for beds and sheds financings.

Canny sponsors will also be aiming to seek out opportunities to add value in the less favoured sectors. As LaSalle warned in its client report, investors face the danger of overpaying for assets in segments such as residential and logistics as they become increasingly competitive. LaSalle suggested the most successful equity investors in 2021 would be those that are not only active in the favoured sectors, but which are also willing to take advantage of mispriced assets in sectors such as retail and offices.

Lenders may find opportunities to back experienced sponsors as they put in place plans to reposition underperforming, but quality, office buildings, or to redevelop well-located retail assets into properties with more suitable uses.

It makes sense, given the continued uncertainty, for real estate lenders to play it safe this year. That means much debt capital will be targeted towards prime, core lending opportunities in the in-demand beds and sheds sectors. But with debt in shorter supply than it was before the pandemic, selective lenders will also find opportunities elsewhere in Europe’s real estate markets.