The European real estate market descended on Munich for the annual EXPO Real trade fair in October. Daniel Cunningham headed to the exhibition to test the mood.
EXPO Real 2016 in Munich certainly seemed as busy as ever. Darting between meetings in the Messe München exhibition centre was no easy feat, as crowds of property professionals negotiated their way around the gargantuan halls.
By the organiser’s reckoning, there were 39,101 attendees – up 1.9 percent from last year’s event.
As is traditional, many delegates began their stint in Munich with a visit to the last day of the city’s Oktoberfest. If some looked slightly jaded on the opening morning of the trade fair, it was hard to know whether market conditions or the previous night’s steins of beer were to blame.
The many debt specialists in attendance at EXPO seemed far less positive about the world than in recent years.
“We’ve got Brexit, a referendum in Italy, elections across Europe,” remarked one debt adviser, listing some of the macro-concerns on peoples’ minds. Mention of the US election tended to spark either nervous laughter or weary shakes of the head.
The UK’s vote to leave the European Union was, perhaps inevitably, the main talking point. “Brexit has been, from the financial market point of view, a non-event: It was a shock, not a crisis, it was a regional shock, not a global shock, and it has been a temporary shock, it lasted about a week,” was the view of star US economist Nouriel Roubini, a keynote speaker at the exhibition. However, the man once dubbed ‘Dr Doom’ for his predictions of a crash ahead of the Global Financial Crisis, also warned: “Europe needs to stick together, because either you swim together or you are going to sink together.”
Delegates certainly did not see the referendum result as a non-event. The impact of the vote has sent shockwaves through the continent, although German bankers generally explained that the UK remains crucial to their business strategies. “We won’t shy away because of the blip,” one said.
German bankers noted that UK margins have crept up by 15 to 20 basis points in new deals, while one said that loan-to-value ratios have been dialled back by 5 to 10 percent since the vote. “It shows that the market has recovered to a certain extent and that people are willing to do business,” was his optimistic take on it.
Research released at EXPO by Cushman & Wakefield suggested that European lenders remain largely committed to the UK market. The consultancy said that 95 percent of banks and lenders that it polled indicated that they will continue to originate debt against UK real estate. Deal volumes rather than sentiment will be the real measure, however.
One lender, Munich-based insurer Allianz, used EXPO to indicate its growing interest in the UK market. Head of debt Roland Fuchs told assembled journalists at a press briefing that the firm is “actively seeking” UK debt investments.
The recent upward movement in margins is mainly a UK phenomenon attendees said. In other core markets, one lender explained, some debt providers have been prepared to relax covenant packages in order to compete for deals. “I hate the idea that underwriting standards could slip,” the lender admitted.
The state of the German debt market was widely discussed. The country’s bankers have long advocated for an increase in pricing levels across the uber-competitive market, although judging by the talk at EXPO, little has changed.
“Margins frighten me,” one German banker said, “I don’t know how people are making money. Things are unlikely to change for the next few years as long as rates stay where they are.”
Discussions with German lenders frequently turned to higher-priced markets such as the Nordics and the US, which many are targeting in order to capture higher margin deals. “We like Scandinavia because it is stable and very transparent. It has a ‘shake hands’ mentality,” said one. “US margins are higher proportionally, even though you have to factor in the currency costs,” said another.
Two deals cropped up in conversation. Firstly, Korean investor Samsung SRA’s purchase of the Commerzbank Tower in Frankfurt for €680 million was proof to many that global investors still place high value on core European property. It is the sort of deal that risk-averse lenders will be clambering to finance. Secondly, the €1.4 billion refinancing of P3’s pan-European portfolio across three major loans provided evidence for some that significant financing opportunities are out there, and not just for core, shiny office buildings.
The sheer number of attendees at this year’s EXPO reflected the fact that huge volumes of capital – both equity and debt – remain focussed on the European real estate sector. Investing that capital, however, is more of a challenge than in recent years.