Between 6 and 28 October, when CREFC Europe ran its Q4 sentiment survey, the UK was experiencing a political and economic crisis that resulted in the resignation of Liz Truss as prime minister. Meanwhile, eurozone interest rates were raised to their highest levels since 2009. Concerns among the real estate finance industry body’s members were captured in both the survey data and anonymous comments.
“Not surprisingly, it’s a pretty grim picture,” says David Dahan, industry initiatives director at CREFC Europe.
Sentiment towards the UK market was markedly worse than towards continental Europe, with 51 percent of respondents viewing overall UK market conditions as ‘significantly worse’, compared with 19 percent of respondents to the same question for continental Europe.
Dahan notes sentiment towards pricing improved in continental Europe, likely due to lenders benefiting from higher margins. However, most sentiment indicators took a sharp downward turn. “Debt availability, volume of new business, resilience of existing books – sentiment took a nose-dive in the UK, while the decline in continental Europe was a bit less pronounced.”
The sentiment indicator for members’ perceptions of the economic environment was down, albeit not as low as in Q2 2020, at the height of the covid-19 crisis. However, sentiment towards the political environment was at its lowest since the survey was launched at the start of 2019 – a factor Dahan believes was heavily influenced by the turmoil in the UK government.
Sentiment towards real estate market fundamentals in the Q4 survey was interesting, says Dahan. “When you look at the overall picture, it’s definitely deteriorating. Sentiment towards offices is at its worst since the survey was launched. Retail is down, but not at its worst. The gloss has come off industrial and logistics, and hospitality is declining following a positive bounce during the summer.
“The only sectors that are afloat, in terms of perception, are accommodation-based sectors, excluding hospitality. Three sectors remain above the zero line, in positive territory – student accommodation, private rented sector and alternatives such as healthcare and senior living.”
The survey results also revealed a lower risk appetite among debt market participants. Dahan says this applied across attitudes towards type of asset, location of asset and type of lending product. “Everyone is saying they see the opportunities at the lower end of the risk spectrum,” he adds.
Dahan says the survey suggested loan-to-values are reducing and interest coverage ratios are more demanding. “There is a positive picture for lenders around financial covenants.”
Underwriting discipline seems to be improving, Dahan says, which he sees as a positive factor in a volatile market. “It all links back to the fact fewer lenders are active in the market,” he adds.
Describe in a few words how you feel about the market
The market is broken. Yields need to widen given increased interest rates.
Q4 will be slower than usual. Cautious optimism for greater transaction activity in Q1 or Q2.
Frustrated as Trussonomics has inflicted totally unnecessary pain.
Very tough in regard to fundamentals. But great opportunities if you have debt capital and are brave.
The most pessimistic since 2008.
Concerned. Lots of downside to go.
Unsettled. Very little transacting. Misalignment between borrowers’ and lenders’ requirements.
Significant concerns about refinancing risk and falling valuation impacts.
Unstable and not yet calibrated.