Unlike the UK, where a diverse mix of real estate lending sources has emerged this cycle, many European markets remain heavily reliant on banks, meaning borrowers have fewer options and less need for advice when sourcing loans.
However, market conditions are changing and intermediaries argue demand for their serives is growing. Uncertainty surrounding Brexit has encouraged some to sell in the UK and buy in Europe, while advisors at the larger end of the scale note an increase in big-ticket European deals ranging from single, core assets to portfolios snapped up by private equity clients.
The Continental European debt advisory market remains fragmented, with few firms operating on a pan-European basis. While some large property consultancies offer debt services across Europe, the advisory space tends to feature independent practices with expertise in specific jurisdictions.
“There are quite a few local entities that each operate in their own market, but a lack of entities that can transfer best practice from one market to another,” explains Alexander Fischbaum, managing director of AF Advisory, which is based in London, but operates across Germany and other European markets.
Those in niche practices in European markets argue full-service property consultancies, despite having offices in several jurisdictions, have limited reach in certain markets. “They haven’t been able to access the right clients, nor establish the necessary network of lenders and other sources of capital,” explains Curth Flatow, founder of Berlin-based advisory FAP Finance. “Some property advisors try to integrate a property and financial approach within one large team that might include just one finance expert. In the Continental European real estate market, you need a very local approach; people who fly in and out from London cannot break into the market,” argues Paris-based Francesca Galante of independent debt advisory firm First Growth Real Estate.
Continental Europe has lacked a culture of seeking external advisors, meaning such practices are yet to proliferate, says Fischbaum.
“Some investors would rather do things themselves and accept a lesser result than a specialist could achieve to save the fee,” he argues. “By comparison, the Anglo-Saxon model is to get many specialists involved and for the developer or investment manager to be the conductor of those specialists, rather than play every instrument themselves.”
Things are changing. As well as the increase in cross-border capital from investors, including US private equity, which are used to paying for advice, sponsors in markets including France and Germany are reported to be increasingly willing to outsource their finance functions to third-party professionals.
“They have recognised the financing market has become increasingly difficult to navigate. While before there were only banks, now there are debt funds, insurance companies, hedge funds and private equity funds, which have changing strategies,” comments Cyril de Romance, First Growth co-founder.
Different European countries present different opportunities for advisors. In France, borrowers are increasingly seeking advice when financing less straightforward deals, argues Damien Giguet, chief executive of Paris-based Shift Capital. “There is a huge amount of liquidity for core and core-plus deals, which represent 85 percent of the market in terms of volume. Clients come to see us about structuring and arranging debt for deals outside the mainstream market.”
In January, First Growth helped French student housing provider Kley source a €103 million debt package, including a €27 million mezzanine loan, from London-based Cheyne Capital, in the first example of a large refinancing in the country’s emerging student housing sector.
In Germany, while sponsors have predictable banking options for senior debt, advisors are carving a niche in helping clients source more complicated financing deals, including mezzanine facilities. “It has become more complicated to structure even senior financing owing to more regulation and greater demand for information on business plans and cash flows from banks,” says Flatow. However, by targeting less-efficient lending markets such as Spain and Italy, as well as secondary markets and value-add properties, advisors are aiming to add value to clients’ financing processes.
“Secondary and tertiary locations and complex assets or portfolios require more explanation to get a favourable result from the lender, therefore clients are more willing to use external support and advice,” explains Fischbaum. “There is also a shift in requests at this late stage in the cycle with more clients coming to us with comparatively easy assets saying, ‘we bought this at a price above what we would have liked to pay, please help us get the best financing so we can maintain our distribution’,” he adds.
Loan sales and work-out situations in Southern Europe provide opportunities to sell services other than just raising new debt. Lenders, as well as borrowers, require restructuring, special servicing and capital sourcing, often to fund discounted loan pay-offs.
For example, as servicer of Commerzbank’s Italian loan book since 2015, First Growth helped the bank restructure with borrowers, selling the residual book in a process called Project Borromini last month. Galante argues perceived legitimacy in Southern European markets is crucial. Noting a few firms attempted to break into Italy but allocated just 12 months to their strategies, she adds: “You need a patient approach when trying to break into a market. It takes three or four years to show people you’re there to stay.”
The evolution of debt advisory in Continental Europe remains a gradual process. Many markets are small in comparison with the UK and Germany and it is unlikely debt advisory will be as widely embraced as in the US or even the UK markets.
However, for those either following their clients across the English Channel, or building advisory platforms in their home nations, there is a growing need. The major driver, argues Giguet, is the wider evolution of the real estate financing space: “As lending capital shifts from the banking sector to the insurance sector, the need for platforms to match supply with demand for financing will grow,” he says.
Opportunities arise from capital ‘Brexodus’
As some US-backed funds turn their attention from the UK to Continental Europe due to uncertainty surrounding Brexit, advisors argue their services are in greater need.
“In Ireland and Germany, Brexit has pushed out the end of the cycle by maybe another two to three years,” one international investor told the PwC and Urban Land Institute’s Emerging Trends 2018 survey.
Fear of Brexit is not the only motivating factor for increasing investor interest in Europe, with rental growth prospects in many cities also a major driver. However, as capital moves to the continent, advisors are keen to follow.
UK advisor Brotherton Real Estate recently signed its first debt term sheet in Europe, representing an institutional client in a Portuguese shopping centre deal.
Richard Fine from the firm says Europe will be a “big growth area” in the coming 12 to 18 months. Like other UK brokerage firms that follow clients on the continent, the company is raising debt from UK and US debt funds as “international investors need higher leverage than local banks can provide to make deals work for them”, says Fine.
Brotherton is currently raising mezzanine capital from the US to fund a series of residential developments in Madrid.