The impact of the covid-19 pandemic will continue to be felt across Europe’s property finance market in 2021, as lenders get to grips with situations of stress in their loan portfolios and banks reconsider their appetite for the sector, according to real estate debt specialists.
Real Estate Capital spoke to property finance professionals to discuss their predictions for 2021. Most were optimistic that better market conditions are likely, compared with the uncertainty of 2020. However, they agreed that many of the issues caused by covid-19 are yet to be resolved. Here are the trends debt experts expect to shape the sector this year.
Vaccine rollouts will eventually lead to more debt mandates:
Consultancy CBRE reported European investment volumes of €275 billion in 2020, down 17 percent on the previous year. The total was better than expected, it said, with sectors including logistics, healthcare and multifamily holding up. However, lenders complained throughout 2020 of a reduction in financing opportunities. The latest data from The Business School at City, University of London, show H1 2020 UK lending volumes were 34 percent down, year-on-year, to £15.5 billion (€16.9 billion).
Clarence Dixon, global head of loan services for CBRE, told Real Estate Capital he expects a “year of resurgence” for the European real estate market in 2021, albeit not a return to the levels of activity of 2019. “Subject to successful and widespread immunisation progress, a certain normalisation is expected. Businesses will be reopening without the possibility of continued lockdown and disruption.”
While he is hopeful that debt market participants view the situation positively, Dixon added that he does not expect the gradual resumption of market activity to “create an abundance of debt opportunities until Q3”.
Craig Prosser, head of UK real estate finance origination at German bank LBBW, is similarly hopeful for the market’s prospects, but also expects a lag until lending market conditions ease. “I’m bullish about the market’s ability to come back now there is a vaccine. But we may be waiting until the end of the year for things to return to some sort of normal. So, for the market, underwriting loans in this environment is likely to continue to be challenging.”
He added: “We need to keep an eye on interest rates. The vaccine may mean our lives get back to normal, and there is huge pent-up demand for travel, and we may see oil get back to $60 to $65. That means we may have increased expectations of inflation, and interest rates may pick up.”
Lenders will be less likely to extend forbearance. But their approach will be sector-specific:
In the main, European lenders have waived loan covenant breaches by their borrowers since the onset of the pandemic. However, debt advisors we spoke to expect lenders to be less willing to extend forbearance in the coming months, as they get to grips with problems in their loan books. However, while lenders are likely to seek resolutions to such situations, most expect them to opt for a collaborative approach to doing so with their sponsors.
“I don’t think there will be a wholesale issue of lenders forcing sales,” said Michael Kavanau, head of debt and structured finance in Europe for consultancy JLL. “There was already less gearing in the system than during the global financial crisis, and we were late cycle, so people had become more defensive in their strategies. We don’t think there will be a huge volume of enforcements, but there will be more than we saw in 2020.”
Kavanau added: “There could be high profile defaults in the retail space, but everybody knows that space is difficult, so it will be consensual.”
Another debt advisor, speaking anonymously, also believes lenders’ responses will be sector dependent. “If a borrower’s loan-to-value is reasonable, and the issue is a short-term reduction in income, I don’t think lenders will enforce. In retail, however, where there are higher LTVs, we will see more lenders act.”
The advisor expects any additional rounds of covenant waivers by lenders to be conditional. “They will want more from their borrowers – partial paydowns, or more equity to be put into deals,” he says.
Not all sponsors will be keen to inject fresh equity into troubled assets, said Kavanau. However, he does not expect widespread instances of borrowers handing ownership of assets to lenders. “It will be very circumstantial – a lot depends on where a fund might be in its lifecycle and if there is as chance for recovery over a time-frame. If the equity has gone and the chance for recovery is multiple years, they might reconsider.”
CBRE’s Dixon expects a degree of “market turbulence” as government subsidy programmes are gradually discontinued, leading to more distress. “Not all occupiers are expected to survive the multiple lockdowns and insolvencies will begin to materialise. This will subsequently create opportunities for distressed debt investors.”
Strategic loan sales will become a feature of the market:
Several banks restricted their lending to existing clients in 2020, in response to the pandemic. Some sources we spoke to expect banks to further reduce their real estate exposure in 2021, including through sales of existing loans.
JLL’s Kavanau believes banks will go further than off-loading legacy non-performing loans. “I think it will be more tactical. There will be some NPLs sold, but also sub-performing, as well as performing loans. There are a lot of people distributing performing loans. Lenders’ hold amounts are set up for this distribution model, so they are used to distributing elements of loans. So, we may see some sell portfolios of performing loans.”
JLL has even established a new business line – loan and restructuring services – to provide strategic advice and get ahead of the trend, he added.
Kavanau believes there will be no shortage of buyers for such loans. “One of the good by-products of the global financial crisis was all this capital formation and a lot in the credit space, all the way up and down the stack. There is capital for almost any risk profile. Even if you are the 90-100 percent LTV part, you can sell it.”
Dan Smith, chief executive of London-based property lending business Fortwell Capital said he has heard about banks reducing their lending activities and leverage. He expects to see loan book management by the banks in 2021. “We hear some of them may be considering putting together higher leverage loan books to sell, to manage their balance, rather than have to potentially set aside high levels of regulatory capital.”
As banks reconsider their exposure to real estate, and even sell off parts of their loan books, sources agreed alternative lenders will increase their share of the financing market during 2021, in what could prove to be a legacy of the covid-19 crisis in European property finance markets.
Click here for the second part of our overview of real estate debt experts’ 2021 predictions.