There was an air of optimism at this year’s MIPIM in Cannes, with attendees quick to argue that another positive year is in store for European real estate.
At the event, CBRE noted a record €291 billion of investment in European property during 2017 and there was plenty of talk along La Croisette of Europe’s economic growth.
The event felt as busy as ever, with the organiser, Reed MIDEM, putting the number of attendees at 26,000; up by 7.4 percent year-on-year.
However, positivity was tempered by a note of caution. Many acknowledged that a market correction is overdue, with artificially low interest rates having kept property yields relatively attractive to investors.
Lenders, and equity investors, described a very competitive European market. Many are focused on core property, which is getting more difficult to source as the cycle progresses. Lenders and borrowers alike, reported that a lot of debt is chasing a dwindling amount of deals. Attendees painted a picture of a buyers’ market.
“Banks have more liquidity and there are more alternative lenders in the market. At the same time, availability of assets is limited. This is putting pressure on margins,” said Michael Kröger, head of international real estate finance at German bank Helaba.
Senior German margins remain Europe’s lowest – 60 basis points was again mentioned. Paris is also getting tighter, with some doing business below 100bps, according to sources. The UK stands at 120bps to 140bps, some said.
“Banks are promoting their services with a focus on factors such as speed of execution and the ability to provide different products like revolving credit facilities, because the market for senior debt is so competitive,” said one borrower, Jirka Lhotak, chief financial officer for EMEA at CBRE Global Investors.
“The provision of debt for value-add strategies is adequate, with competitive terms. Sponsors will not obtain five offers within 50bps of each other, but there are enough niche players willing to back value-add strategies.”
In some markets, borrowers are keen to lock in finance for longer tenors, perhaps due to the threat of rising interest rates. “The five-year lending market is indeed very crowded in Germany; liquidity is increasing for 10-year loans with pricing around 100bps,” said ING Real Estate Finance’s head of Germany, Michele Monterosso.
A hot topic was lenders’ attitudes to loan covenants. Some described lenders moving towards covenant-lite structures for some of the market’s more prominent sponsors, as is the case in the US market.
“Lenders say they are not issuing covenant-lite loans, but, in practice, in a few circumstances so far, this type of loan is being written by some,” said Christophe Murciani, head of CRE debt funds at French debt fund manager Acofi Gestion.
Lenders are less focused on interest coverage ratio and increasingly focus on debt yield covenants, some argued. “ICR has become less relevant – why set an ICR covenant at 200 percent if the current coverage is above 700 percent? We try to avoid debt yield if we can, but many lenders are using it as an alternative measure. I don’t think they are necessarily relaxing covenants, just choosing the most relevant to today’s market,” said Lhotak.
Leverage, however, is a measure that most lenders are unwilling to negotiate for senior loans. “Lenders are not reckless, they are competitive but cautious. Project quality, terms and sponsor remain important to them,” added Lhotak.
Attendees at the event discussed the willingness for investors and lenders to edge up the risk curve in a bid to source profitable business.
“In Europe, investors seeking higher returns need to find a niche, but it is hard to find one that others have not spotted,” said Johannes Anschott, a member of German asset manager Commerz Real’s executive board.
“Given the stage of the cycle, by definition, investors are being pushed up the risk curve to achieve similar returns,” said Charles Balch, head of real estate finance – international clients, UK and CEE – at pbb Deutsche Pfandbriefbank. “People raising capital in the core and core-plus space are finding it more difficult to source opportunities with the relevant returns; those raising for five or seven-year funds might have to deal with a correction.”
French fund management giant Amundi is one firm considering supplementing its plain vanilla business with higher-returning deals, explained Pedro Antonio Arias, the firm’s director of real and alternative assets: “Within our real estate equity and debt strategies, we are focused on core and core-plus assets across the eurozone, but we are open to diversify and contemplate value-add product. Repositioning and transitional products provide higher returns.”
Alternative lenders are not the only ones broadening their lending scope. German banks are also reported to be moving up the risk curve. “A German bank told me recently they are starting to look to value-add properties, allocating 70 percent to core assets and 30 percent repositioning assets. This shift is linked to margin compression in the core segment,” said Chris Holmes, head of head of debt UK at JLL.
The hunt for additional value in Europe is leading investors into sectors buoyed by demographic trends, including healthcare, logistics and build-to-rent. An increase in interest in development and so-called ‘build-to-core’ strategies was a topic of conversation at the event.
Geographically, it is getting more difficult to find markets which offer value-add returns. Spain, for example, is now attracting the sort of German banks which do not go high up the risk curve, with margins now around the 150bps mark. “We will see opportunistic investors sell to institutional players in Spain. The market has become more stable,” said Sabine Barthauer, member of the board at Deutsche Hypo.
ING’s head of Iberia, Julian Bravo, acknowledged that Spain is less a value-add play, although Portugal offers higher margins. “Portugal is like Spain three years ago, although it is difficult to find large deals in the office sector, so we have mostly financed portfolios.”
European real estate remains a magnet for global capital, but with an abundance of debt, lenders need to work harder to seal deals.