Emerging Trends report suggests new lenders are unlikely to plug funding gap, writes Alex Catalano
Europe’s property doyens are expecting a lost year. Emerging Trends Real Estate Europe 2012, the annual pulse-taking conducted by Urban Land Institute and Pricewaterhouse-Coopers, found that financiers, fund managers, occupiers, investors and developers alike think that sitting on their hands is the smartest thing to do this year.
“Prepare for the big freeze; economic uncertainty is causing paralysis,” says John Forbes, PwC’s real estate funds partner. Interviewees told Emerging Trends that if decisions are being made to invest, they are being made on the basis of where one would lose the least money. The sovereign debt crisis, poor growth prospects, cooling occupational demand and increased regulation are taking their toll.
The overwhelming consensus of the 600 industry leaders canvassed is that there will be less debt for real estate (see fig 1). With banks under pressure to improve their capital base, commercial real estate lending is a prime target for cutbacks.
Tellingly, lenders are the most negative; 94% thought that the volume of debt capital available would fall this year. The most positive outlook came from Russia, Turkey and Germany; between 13% and 25% of the survey’s respondents in those countries thought lenders would be providing moderately or substantially more financing this year.
However, the pressure on banks to deleverage is not bad news for everyone. “Alternative lenders are coming in to fill the gap,” says Forbes; debt accounted for 11.6% of investors’ allocations (see fig 2).
Mezzanine funds hope to plug part of the lending gap and some insurers have begun to provide senior debt. “We are starting the lending exercise,” says Olivier Piani, CEO of Allianz real estate. “There will be more lending opportunities than buying opportu-nities in 2012,” he predicts.
However, these new market entrants will not solve the debt problem. “The aggregate of all the so-called new players will not replace the reduction of debt that Royal Bank of Scotland will undertake by itself,” notes John Barakat, head of real estate finance at M&G Investments.
Bank deleveraging is also expected to force more asset sales in 2012 (see fig 3), although interestingly, lenders were slightly less convinced of this than investors.
Brighter equity outlook
On equity, the prospects are brighter (see fig 4). “Institutional investors and equity providers are much more positive,” notes Forbes. Three-quarters of this group think there will be more capital available. German and French respondents were particularly optimistic.
Greater equity availability does not mean this capital will get deployed. Thanks to the sovereign debt crisis and vanishing growth prospects, investors are in risk-averse mode, unwilling to commit. “There is no penalty for holding onto your cash and the risk is that you will miss bargains if you buy too soon,” says one fund manager.
Investors are shunning the top-down approach, not convinced that they can make money by picking countries, cities or sectors. “Everything is so property-specific that we are staying away from making judgments about asset classes,” one interviewee told Emerging Trends. “Real estate is going back to being a granular business, making money asset by asset,” says Forbes.
This approach favours those with property skills and respondents indicated that 41.8% of allocations would be in value-added, opportunistic, or development investments, with 47% going to core or core-plus.
Alternative sectors, such as health care, hospitals, data centres and even wind farms or solar energy parks are also attracting attention from those interested in longer-term income.
The survey’s respondents think only a handful of markets will get more investment this year: Berlin, Hamburg, Istanbul, London, Moscow, Munich and Stockholm. Rents and capital values will remain static in most of these cities, they expect.
Of the top 10 markets, London and Paris are prized for their liquidity and “safe haven” status, but both are lower down in the rankings – 10th and 6th respectively because investors are worried that price for core assets are peaking.
Istanbul and Munich topped the cities list for investment prospects, though the report notes that Istanbul’s attractiveness may be more of a comment on its exciting economic growth prospects than a sign that capital is about to flood in.
Germany is INREV investors’ top pick
Interestingly, INREV’s annual Investment Intentions Survey, published last month, found very similar sentiment about markets. Its respondents, who invest via unlisted funds, put Germany and the Nordics at the top of their preferred locations.
The UK, meanwhile, fell out of the top five preferred investment locations, with UK offices ranked 10th and French offices, second last year, dropping to sixth.
The increasing burden of regulation was also highlighted in Emerging Trends. Basel III, Solvency II and the Alternative Invest-ment Fund Managers Directive (AIFMD) has huge implications for banks, insurers, fund managers and, eventually, pension funds.
“The real estate industry fears the long- term impact of regulation more than almost anything else,” says ULI chairman Peter Rummell.
While Basel III is already having a huge impact on the availability of bank debt for real estate, it is unclear how Solvency II will play out for insurers (see News). AIFMD, which will regulate real estate fund managers in the EU, is likely to increase the pressure for consolidation in that industry. This is likely to give the bigger players, who can deal with the cost and administrative burdens of regulation, a competitive advantage.
European chapter opens in growing Allianz loanbook
Allianz is one insurer that is developing a European real estate lending programme. For the past 30 years we have been lending money to real estate, ” says Olivier Piani, chief executive of Allianz Real Estate.
Allianz has a $5bn US loanbook. “In the US, we get a higher margin, but as bank lending margins on European real estate have risen, insurance companies are looking at lending,” Piani adds.
Conservative senior debt with a seven-to- 10-year term can generate 4-5% margins for lenders, which is a better yield than either German government debt or German pfandbrief, at around 3%.
“We will lend on assets we’d be happy to own, with cash flows, for a five-to-10-year term,” says Piani. “Fixed-rate and long-term money is not bad for the real estate world.”