I came away from MIPIM this year with mixed feelings. There was a lot of positive sentiment, but also an underlying negativity. On the positive side: the world is awash with equity, plenty of people are talking about providing mezzanine finance and I received very positive feedback from banking clients on the debt side. But there is an underlying feeling of caution. Investors are concerned about the economy and the potential impact of the government’s cost-cutting regime. Many of us operate in the mighty city state of London, but elsewhere in the UK there is still uncertainty over property performance.
There are concerns about events in the wider world, particularly North Africa and the Middle East. There has also been the catastrophe in Japan, the consequences of which are not yet understood. I wonder whether we have seen this before, in the lull of the mid 1990s. One investor said he felt it was 1994 again; certainly it feels similar.
Everybody is chasing the same product: some variant of ‘prime’, the definition of which varies. Everybody is concerned about secondary property, with good reason. Investors are also seeking properties with angles; but when haven’t they? Regarding debt finance, just before MIPIM started I publicised my six-monthly list of active, bigger-ticket lenders on UK property. This is always a bit challenging before getting to MIPIM and testing the temperature of the water first hand.
The sentiment when I arrived was incredibly positive. Some lenders are seeking larger lot sizes and others to increase their annual lending target. I identified half a dozen lenders that might be prepared to lend more than £100m on their own. However, the problem, as ever, is finding suitable opportunities. I received the usual rash of comments and complaints about my list, but this time it was more about who should have been included as an active lender, rather than who should have been left out. That is also very positive.
One theme confirmed in Cannes is insurance companies’ growing interest in property lending. The forthcoming EU Solvency ll rules give insurers an incentive to look at property lending. My list of active lenders includes US insurer MetLife for the first time. At MIPIM I found that perhaps half a dozen other insurers are seriously looking to lend, including Axa, L&G and M&G. There was much talk about Far Eastern lenders, but we have yet to see much action in this area.
Another topic of discussion was what banks with large existing loan books are doing to work them out. Everyone expects more property to emerge from banks this year – but we have been saying that for the past two years. I believe it has to happen sooner rather than later, though, because the extending of existing loans must reach a limit in view of reducing lease lengths and asset obsolescence. The refinancing bubble is gigantic and growing all the time. In the next 12 months I think banks will release many big portfolios, of loans or properties.
One of the reasons why we have not seen more bank disposals is a mismatch between buyers’ and vendors’ expectations. I think this gap will narrow in the next few months, which probably means banks reducing their expectations, leading to further write-offs. It is hard to generalise on such a huge issue, bearing in mind the number of banks involved, with different lending policies. For those that have publicised a desire to reduce the size of their balance sheets, this is a particular challenge.
But a couple of US banks told me they had already disposed of almost all their former loanbooks and are ready to start lending again, seeking in particular added-value opportunities. The industry has to lift the burden of existing loanbooks if progress is to be made. In many quarters there is a cautious, ‘wait and see’ attitude. On balance the market remains positive, but sombre, considering the wider macro economic background. The market’s temperature was certainly warmer than the MIPIM weather!