The future of Britain loomed large amid talk of pricing and competitive pressures. Real Estate Capital’s deputy editor, Daniel Cunningham, took the temperature of the European market in Cannes.
With the UK’s vote on European Union (EU) membership looming on the horizon, it was not surprising that political and economic issues were top of the agenda at this year’s MIPIM. British delegates were particularly engrossed by the subject, but continental European colleagues also voiced their views.
One senior German banker, Aareal management board member Dagmar Knopek, admitted that a potential ‘Brexit’ is already affecting real estate. “The Brexit decision is something that everyone is looking at – and which already influences investment decisions,” Knopek told Real Estate Capital.
“Everyone is worried about Brexit, there’s a real sense of fear,” said one London-based banker. Another added that Oaktree and Patrizia’s planned sale of the Winnersh Triangle business park in south-east England will be a “market defining” deal; bids are reportedly due around the time of the referendum, testing investors’ confidence in the UK.
The subject of whether the European real estate market has peaked took something of a back seat, although one delegate joked that the sheer number of be-suited drinkers packing popular watering hole Caffe Roma perhaps indicates an overheated market. Most, though, argued that there are a couple of years’ growth left in Europe.
Roland Fuchs, head of European real estate finance for Allianz Real Estate, said: “There is a positive spread between property yields and bond yields which provides a risk buffer. We think that 2016 will be the year of large pan-European portfolio transactions on both the debt and equity sides. There will be an increase in portfolio financings with a European scope.”
The global profile of MIPIM attendees helps to provide some broad context to the market. Howard Roth, New York-based global real estate leader for EY, discussed his recent travels in Asia and the Americas. “My feeling is that, east to west, we are still at the beginning of a long trend of capital flowing out to Europe and the US. No country, China or otherwise, can constrain capital within its own borders. Japan recently legislated for pension funds to invest outside its borders.”
London remains on US clients’ radar, Roth added: “London is unique. My feeling is that it is not as late in the cycle as the US. American clients are generally very interested and positive on Europe. The strong dollar doesn’t hurt. Europe seems like a good buying opportunity.”
Speaking to debt specialists from the core European markets, there is a sense that lenders are under increased pressure. French delegates admitted that the domestic lending market is challenging; loan pricing is flat, with 120 basis points noted for core property.
“The banking industry is subject to increasing regulatory constraints from the ECB, FSB (Financial Stability Board), Basel Committee and local regulators which will require additional capital to be allocated to lending activities,” said Geoffroy de Vibraye, co-head of real estate finance France for ING. “Combined with a negative interest rate environment, increased pressure is expected on banks’ returns and pricing going forward.”
Prime French margins are around 25 to 30 bps below comparable deals in the UK, but most expect lenders to edge their pricing upwards. German lenders were in Cannes in force and shared similar sentiments.
Germany ‘most competitive’
“The German market is still the most competitive because it has the largest number of banks,” said Allianz’s Fuchs. “We only did one German transaction during 2015 because it was part of a wider portfolio. Margins went down to as low as 60-80 bps in Germany. We see evidence in Germany that pricing is flattening out, because at some point the risk-return profile still needs to be satisfactory.”
Björn Kunde, head of debt advisory for Savills in Germany, added: “For core German locations, the market is very competitive but it becomes more difficult for value-add. Finance from German banks, which remain risk averse, is either available on good terms, or not at all. This creates room for a growing number of alternative lenders which are able to step in. Especially for the core segment, I think we have seen the bottom of the market in terms of margins. It is challenging to be profitable for banks at those levels.”
Another German debt broker said that properties in Germany’s ‘A’ cities, as well as prime residential in ‘B’ cities, command the low margins. Beyond those areas, pricing rises to above 100 bps, with logistics, hotels and offices in ‘B’ locations typically priced in the range of 120-140 bps.
UK bankers also discussed pricing, although there was a sense that margins have already crept up from the low seen last year.
“Pricing has probably seen a 25 basis points improvement since Q3 last year,” one British banker commented. “It’s a combination of a number of factors; Libor has come down so it makes lending even less profitable against how banks fund themselves in the retail market. There are also macro-economic factors such as China and now the Brexit uncertainty.”
Prices creep up
Despite the apparent upward creep on pricing, some banks are reportedly considering implementing Libor-floors in their deals by which floating rate margins would not be allowed to slip beneath a pre-agreed level in a bid to protect their margins.
On the top-of-the-market debate, the British banker was adamant that he and his peers are not dismissive of the high prices being paid for London assets: “People do remember the last cycle. Everyone is nervous about where values are going.”
Despite the various sources of concern, lenders were generally able to talk about high 2015 lending volumes during the conference. Allianz, for instance, reported a doubling of its loan book to €4 billion last year. Some claim that they are targeting the same volumes again this year, although not all sound entirely convinced they will be successful.
For chief financial officers at MIPIM, there was an acknowledgement that it is still a good time to be a borrower.
“Debt pricing has gapped out some 20-40 bps on prime UK and 5-15bps for prime Europe since November 2015 but it’s still a ‘Goldilocks’ period to be doing financing,” explained Colin Throssell, CFO of TH Real Estate. “Margins remain historically low and interest rates are lower than predicted, so locking in for a long tenor makes sense.”
Throssell continued: “You can easily achieve all-in debt costs of well below 3 percent. If you lock finance in at 3 percent and achievable rates subsequently fall to 2.8 percent, then, OK, you’ve called it slightly wrong but you’ve still done a fantastic deal for your investors. It’s amazing to have what has now been such a sustained period of stability at such low levels.”
Dennis van Vugt, EMEA CFO of CBRE Global Investors, agreed that there are plenty of options for investors aiming to finance properties for a longer period. “For a ten-year term, insurers are willing to provide debt at very competitive terms. They tend to be cheaper on larger transactions for long-lease, good covenant properties.”
Sales ‘purple patch’
The non-performing loan portfolio market was also a talking point. The consensus is that the purple patch of loan sales activity which started in 2011 is over. However, increased capital regulation is expected to force banks to dispose of NPLs. The Netherlands, Spain and Italy continue to interest investors and the €5.5 billion Project Swan portfolio currently being marketed by Dutch bad bank Propertize was frequently mentioned.
“It will be interesting to see the secondary markets for deals such as Project Swan in the Netherlands and Spanish NPL deals,” said Bruce Nelson, president of Situs Europe. “Given the prices paid for some of these portfolios, as buyers dispose of these assets in the secondary market, they are going to be challenged to find much upside at current yields and limited financing options.”
Steve Powel, CEO of Situs, visiting Cannes from New York, contributed a US view: “People came to Europe anticipating deep discounted widespread opportunities which have never truly materialised due to the banks’ inability to recognise losses, not dissimilar to investors’ anticipation in the US markets.”
By Thursday morning, as delegates began their last day in Cannes, the miserable weather of the previous day had improved. Most will remember the rain at this year’s MIPIM, but there was also some sun to be had.