Welcome to the fifth instalment of the serialisation of our deep dive on the questions lenders need to ask during covid-19.
From interviews with 16 market sources from the European real estate debt market, including bank lenders, debt fund managers, valuers, lawyers and borrowers, Real Estate Capital has identified five crucial questions debt providers are asking themselves to ensure solid underwriting in the face of the pandemic crisis.
The deep-dive analysis on these questions has been serialised over the course of this week. We are revealing the fifth question now but, later on the day, we will publish the full story. Stay tuned.
Question 5: Do I want to make this loan now?
Lenders are reassessing their appetite for lending in the current market. Different lenders have different pressures and risk parameters: bank lenders have targets as they need to replace loans that are reaching maturity to keep their books at the optimum levels, while some debt funds need to lend to deploy investor capital in a proposed timeframe.
Others are lending more selectively while considering if a loan deal is worth the risk at all. Then there are lenders with higher risk and return targets, which see the current market as an opportunity to take advantage of increased loan pricing. “It’s quite binary – do you want to be in the market at all right now? Do you have existing problems within your loan book, which senior management might rather you focused on?” says Jim Blakemore, global head of credit investing at manager BentallGreenOak.
Christian Janssen, head of the European real estate debt division at investment manager Nuveen Real Estate, says there is a good refinancing opportunity due to the funding gap left by those lenders hitting pause: “It is a great opportunity to capitalise now on the fact many traditional lenders face challenges to make new loans. While new purchases of assets might slow down in the current environment, the outstanding loan universe will need refinancing.”
If lenders decide they want to be in the market, they need to consider which real estate sectors they see as most reliable in this crisis and on what terms they want to lend against. Most debt providers are reluctant to back retail, while offices, hospitality and student accommodation are a tricky call at present.
Jan Peter Annecke, head of real estate lending at the German bank Helaba, is confident about the longer-term appeal for the office sector: “Office properties in good locations in top cities will continue to function, even if the number of office tenant insolvencies increases. Office properties in peripheral locations or smaller cities, however, will be hit harder.”
John Dunkerley, chief executive of London-based private rented sector residential developer Apache Capital Partners, says the BTR residential sector, in which his firm specialises, has proved to be resilient during the covid-19 crisis. “As lenders consider their real estate exposure, post-pandemic, I expect BTR and other alternative residential asset classes like senior living, supported by long-term demographic growth drivers, to be seen as increasingly attractive investments.”
Sector choice may prove to be as crucial as the decision whether to provide finance at all. Many debt providers will not have the option to turn off the lending tap. But careful sector and location choices, alongside scrutiny of sponsors, tenants and loan structures, may be the best way to mitigate risk.