There were three clear takeaways from Real Estate Capital’s latest Europe Forum, held in London a few weeks ago: banks are back; senior debt spreads have widened since the summer; and risk for property lenders is rising as the real estate cycle moves on.
On the first point, even the debt fund managers attending agreed that anyone who’d thought “banks had gone, so it’s the best lending opportunity for all time” had got it wrong. A tail of banks have yet to clear out their soured loans, like in Italy (Southern Europe Roundtable), but more are on the front foot.
On the second theme, speakers pointed to recent financial market volatility over Greece and China, and in Europe an asset-backed securities glut (which the ECB has unhelpfully not after all waded in to buy) as reasons for the blow-out in CMBS spreads. These have caused the past three European deals, in the UK, Italy and one pan-European, to price below par.
Forum delegates thought margins on private debt are going the same way, stabilising and in some cases rising, reversing the downward trend of the past two years.
Right now that’s not great for syndicating banks with stacks of inventory to distribute at summer prices or for borrowers hoping to refinance at an all-time low.
But this scenario may not last: another explanation for the pricing inflexion was that it’s not so much due to market jitters as simply what happens towards the end of a bumper year. In 2015, everyone seems to have already filled their boots, and for the time being, they can afford to cherry pick the best deals.
So to the third and most important takeaway: the fact that risk is rising as the property cycle moves on. Deals with a 65% loan-to-value ratio now would have been 100% three years ago and cap rates are at or approaching all-time lows. More real estate is looking fully priced, while the interest rate cycle has yet to play out.
Obvious, but what to do about it? The Bank of England has chosen this moment to give the property industry a shove. It “wants to help” the UK property industry set up a CRE loan database – believing that more data will provide the information needed to manage the risk of loosening underwriting standards – and adopt “through the cycle property valuations”.
Many banks are already looking at their loan rating models and thinking even harder about whether they are being paid properly for the risk. Action on either would be certain to make the cost of borrowing higher.
End of a Real Estate Capital era
This issue is my last as Real Estate Capital editor before the baton passes to PEI Media colleague Andy Thompson, most recently the editor of Infrastructure Investor. Andy has 14 years of financial journalism experience, covering the corporate finance, private equity and venture capital sectors.
He’ll work closely with Al Barbarino, our New York City-based senior journalist and a new real estate finance writer who will be joining later this month.
My involvement as consultant editor will be to continue writing about the trends and people that have made this job so interesting.