REC Finance Forum: Lenders cautious, but the cycle isn’t over

Delegates at Real Estate Capital’s European Finance Forum hear that lenders remain cautiously positive

European real estate lenders are exercising caution, although the property cycle has not yet reached its peak across Europe, delegates at Real Estate Capital’s Finance Forum: Europe 2016 heard this morning (27 September).

Speaking at London’s Institute of Directors, panelists at the event admitted that banks and alternative lenders are more risk-averse than they were in 2015 in the face of rising political risk, but stressed that a variety of lending strategies continue to be implemented across the market.

Polled on the topic of where we are in the cycle, 49 percent of audience members said that they believe the market is still solid, with leverage and construction levels in check. While 24 percent said that there is still a way to go, 22 percent were of the opinion that time is running out.

“In real estate, we all know we are in a cyclical market; the difficulty is working out what stage we are at,” commented Michael Acratopulo, deputy head of CRE UK at Wells Fargo.

Acratopulo noted that although values in some sectors appear very high, the UK’s regional cities have been having their strongest year “for some time”. He also noted that rents remain high in some markets.

“In the UK we need to be mindful of where the indicators are pointing. But we also need to be aware that there are some positive indicators,” he added.

“Different parts of Europe and different sectors within markets are at different stages of the cycle,” commented Duncan MacPherson, head of debt capital markets at Starwood Capital. MacPherson noted that the debt fund investor, which can lend across Europe, has eased off on writing loans in the London market, with banks refinancing its London loans from 2013-2014. “That’s how it should work. We wrote transitional loans,” MacPherson said.

Lending to transitional properties will shift geographically, he added: “Perhaps somewhere like Madrid will be where the transitional play works best,” he said.

Neil Odom-Haslett, head of commercial real estate debt at Standard Life Investments, said that his firm has been a more cautious lender this year and that was unlikely to change in the coming year to 18 months.

Panel moderator, Mike Shields, head of REF Europe at ING Real Estate Finance, said his bank is also “being more cautious. Our clients are core-plus investors and they are adjusting to conditions, asking for moderate leverage.”

Highlighting the differences between the continental European market and the UK, and levels of capital flows since the Brexit vote, Shields said: “Europe is completely different. It is awash with liquidity.”

On the subject of the UK after the EU referendum vote, a bullish 49 percent of the audience voted that Brexit had had a ‘negligible’ effect on the market, although 47 percent were less optimistic, saying that the impact had been ‘slight damage’.

Panelists claimed that although they are perhaps more cautious, they are sticking to their lending strategies despite the referendum result. “We are trying to be more thoughtful around Brexit, but we have not changed our approach,” said Acratopulo.

“It’s been a relatively benign event from a lender’s perspective,” insisted Christoph Wagner, director of debt strategies at alternative lender TH Real Estate. “We’re lending at 65-75 percent LTV so transactions can withstand market stresses.”

Wagner argued that loan structures have been robust across the maket for several years but agreed caution is evident in the volume of advance rates lenders are willing to provide and the size of the tickets they are prepared to underwrite.

ING’s Shields also noted a change in lenders’ appetites for large-ticket, core business. “Pre-Brexit, a lot of lenders were trying to underwrite half-billion deals. Now, we are likely to see more club deals until people find their footing.”

MacPherson said that Brexit’s impact has been to create uncertainty as to where true capital values are. “We are in a phase of no data. The lender reaction is cautious on advance rates, because lenders don’t know where the ‘V’ in LTV is.”

Acratopulo said that with the “scary” list of macro-economic and political events in play across Europe and the wider world at the moment, lenders are typically aiming to make sure they have portfolios of assets that are defensive.

Shields added that in the UK market, the end to rising values has created a pick-up of investors that passed on investing in London in the last 12-24 months due to pricing. “It’s an opportunity for some to buy in London,” he explained, “although people who bought before Brexit are more cautious.”

During a keynote speech on the European economy, CBRE’s head of EMEA research, Neil Blake, espoused his firm’s house view that the UK government would put off triggering Article 50 to leave the EU until the end of 2017, after elections coming up next year in France and Germany.

With two years of potential negotiations, a UK general election in 2020, and two years to actually implement the process of leaving the union, the actual Brexit might not happen until January 2022, he suggested.

Blake said that despite criticism of monetary policy from German finance minister Wolfgang Schauble, ECB head Mario Draghi was likely to continue with his policies for the foreseeable future meaning that interest rates will remain low.

Polled on the future of the single currency, an overwhelming 79 percent of the audience indicated that they believe it will survive in its current form for at least the next five years.

Despite the uncertain backdrop, the property market is a reasonable environment, Blake added. “There is a modest eating up of vacancy and there is some rental growth,” he said.

Blake said that Eurozone office yields had fallen, although the sharpest fall was before last September. The impact of falling yields on property values had been much higher than at the peak of the last boom. “It’s uncharted water as far as pricing goes.”

“There are many positives in the real estate market,” Blake said. “Pricing is tighter, rents are up. But occupier fundamentals will be increasingly important.”