Property lenders in Europe will increasingly look to alternative asset classes over the next 12 months, while adopting a selective approach to back specific opportunities in retail, according to real estate finance participants canvassed by Real Estate Capital.
Building on the momentum seen in 2018, more major investors are likely to engage with alternative sectors across Europe in the new year, creating the emergence of new financial structures, according to CBRE’s 2019 outlook report. As alternatives become a genuine pan-European investment asset class on the back of a series of key factors – weight of money, perceived security of income, long occupational leases, and large institutions’ evolving strategies – real estate lenders are expected to follow suit.
“Hotspot sectors that lenders will be chasing in 2019 include specialised residential asset classes, such as student housing, senior living and accommodation for the growing needs of social welfare, including, for example, asylum seekers,” says Anthony Shayle, head of real estate debt for EMEA at UBS, adding that, for debt funds, alternatives offer “good routes” for higher returns.
For some of the traditional asset classes, particularly offices and logistics, the European property debt market is also expected to be liquid. Despite slower growth in leasing levels, supply-side constraints will support positive real rental growth in most major office markets in 2019, according to CBRE. Meanwhile, the logistics sector will continue to be backed by a combination of economic growth and expansion of online sales, the global advisor says.
Michael Shields, a member of ING Real Estate Finance’s global management team, echoes CBRE’s outlook for offices, noting that the market looks stable for class A assets, as the lack of high-quality product supports rents and values. The industrial segment, on the other hand, may be “overextended” in some markets, since there has been “quite a bit of new supply”, he says.
In 2019, retail is expected to come under further pressure on the back of structural issues causing turbulence for both occupiers and landlords, which means more casualties are possible, CBRE notes. However, some lenders such as ING’s Shields predict that, over the next 12 months, the market will see selective retail financings as profitable. “Despite retail being out of favour, there are strong performing assets that need financing,” he argues.
UBS’s Shayle adds: “There is untested potential in destination-led and experience-based shopping, which we consider having stronger long-term prospects as the e-commerce phenomenon continues to erode traditional retail formats.”
Debt providers agree the European market will continue to be active in 2019, while some, such as pbb Deutsche Pfandbriefbank, will increasingly look for opportunities outside the continent. “We […] expect to engage more in the US,” said Thomas Koentgen, deputy chief executive officer of pbb. “We aim for primary business to complement the syndication business we have written so far on the East Coast. In addition, we want to expand our reach to include Chicago and selected cities on the West Coast – Seattle, Los Angeles and San Francisco – for syndicated loans.”
On the other hand, Arnaud De-Jaegere and Jerome Gatipon-Bachette, co-global heads of real estate structured finance at Société Générale, note that the only developed economy where interest rates are rising is the US. “Political risk and the [US-China] trade war have increased uncertainty as illustrated by the equity market, and that may lead to adjustments,” they say.
In the UK, the property debt market will remain marked by uncertainties around Brexit, although foreign investors continue to see a natural hedge on the weak pound. “We nevertheless expect investors to wait on Q1 to see if Brexit means a hard Brexit or an interim agreement,” SocGen’s De-Jaegere and Gatipon-Bachette note.
Some lenders see opportunity in UK retail. Barry Fowler, managing director of alternative income at Aviva Investors, expects loan financing to focus on retail acquisition activity. “We may see a flurry of activity from private equity sponsors in the retail sector if there is an extrapolation of the valuation declines reported to date,” Fowler explains. “The challenge will be underwriting sustainable rental levels in a sector exposed to material structural change – this can only be done case-by-case and will rely on careful covenant analysis overlaid on local demand dynamics.”