Q&A: Michael Kröger, head of international real estate finance, Helaba

Michael Kröger of German bank Helaba evaluates the prospects of key markets in Europe and beyond.

This article is sponsored by Helaba

Michael Kröger

Do tight lending margins limit your appetite for the German market?

There is fierce competition in Germany, not only in real estate investment but on the lending side too. That means it makes sense to target opportunities with a value-add aspect to them, to enhance the return profile.

We do not simply try to beat the market on pricing. We are selective about what we will finance. Value-add can mean financing development, of which there is currently a lot in cities such as Frankfurt, or it can mean funding the repositioning of an asset. It can also mean financing stabilised properties where, for instance, the tenant has a break option. Value-add means finding situations where a lender can bring its expertise to the table. That is what clients are looking for.

Germany’s real estate markets are quite competitive, and interest rates remain low. However, there is still business to be done in the country.

What do you see as the strongest foreign markets?

As one of the largest, most liquid markets on the continent, Paris offers opportunities for international investors and lenders. It is an ideal target for Asian investors, because it is possible to source prime, triple-digit investment deals there. It is very competitive, and yields are at a record low. France’s second-largest real estate market, Lyon, is way behind Paris in terms of investment volumes.

Loan margins in Paris are heading towards German levels, but they are still higher. France’s banks have slightly higher funding costs than Pfandbrief banks, which keeps pricing higher there than in Germany.

Do the Nordic countries make sense for a foreign lender?

The Nordic markets are similar to Germany in many ways. They have a strong industrial base, with reliable and sound market participants – both on a local and an international level – as well as a professional market infrastructure.

“The real estate industry will become even more global”

But, at the same time, it is not always easy for foreign banks to penetrate these countries, as you are dealing with four different markets, jurisdictions and currencies. These factors are challenges, but the region’s stability and strong property market fundamentals mean it offers opportunities for banks.

Real estate activity in the Nordics is on a different scale to that in Paris or London, for example. There tends to be a smaller ticket size on lending deals, but that is not necessarily a constraint.

Sometimes it is more stable to be lending across four deals, rather than on one large, single lot.

As Brexit reaches a critical stage, has your view on the UK changed?

It is true that some of the negative news stories surrounding Brexit have led to a cooling-off of interest in the UK. That said, the UK remains a business case for us. We do business there, and not only on a selective basis – because when somebody says they do business on a selective basis, it tends to mean that they hardly do anything at all.

We would not lend against an out-of-town shopping mall in one of the quieter UK regions, but we have a good client base in the country with a long track record. These investors know what they are doing and take a prudent approach. So, we listen to our clients and continue to work with them.

It is true that a no-deal Brexit would be a gamechanger, but the UK remains Europe’s most liquid real estate market. It is transparent and professional and will remain so.

How do you view central and eastern Europe?

It is a very strong region, especially Poland. There has been a continuous growth story in the Polish market’s fundamentals.

The only real constraint in Poland is the shortage of product. There is a lot of building activity – Warsaw is one big construction site – but a lot of the space has already been taken. Five years ago, there were concerns about the size of the development pipeline, with local banks financing construction on a fully speculative basis. However, development has been met by high levels of demand.

The real estate sector in Poland is benefiting from a well-performing economy. This has driven up real estate prices, but not to a ridiculous extent. For lenders, loan pricing against core product still carries a premium to western European markets.

What benefits does the US market have for a European bank?

The US offers a complementary set of lending opportunities to Europe. We have client relationships there going back to the 1990s, when we first entered the market.

The thing to remember is that the lending market in the US is different to that in Europe. Insurance companies do a lot of the long-term, core lending that banks and institutional debt funds are doing in Europe. So, the commercial banks, including the international ones, focus on competing for more complex mandates.

Single buildings in the US are large – especially in the large cities on the east and west coasts – and easily surpass $1 billion in market value.

They can also be up to 1 million square feet, which means they tend to have a lot of leases that expire at different times. There is a management aspect to owning such real estate, which makes it important to select the right client. If international lenders want to be successful in the US, they need to work with professional, local sponsors who really know their stuff.

How do you expect European real estate markets to change in the next few years?

Economic and interest rate developments will naturally be very important. The big question remains: when will the cycle end? If I knew the answer to that question, I’d have made a fortune with the knowledge.

The current cycle is unparalleled in history, and I expect the scenario to remain the same for a while yet.

Amid this low interest rate environment, real estate will remain a strong sector, and I expect to see an increasing number of international investors positioning themselves in Europe.

The real estate industry will become even more global than it is today, meaning arbitrage between markets will become more important.

But for investors and banks with a strong international footprint, this should not be too much of a problem.