Making predictions in a fast-changing world can be risky, but as we start the new year, below are five for Europe’s real estate finance sector in 2019.
The biggest variable will be Brexit, which, just three months before it is due to happen, remains an uncertain prospect. However, considering the fundamentals of the property finance space itself, these are the trends we expect to play out:
1. More lenders will be willing to back speculative development: Lenders are undoubtedly cautious at this late stage of the cycle, although it is difficult to see many meaningfully taking their feet off the gas in 2019. Debt providers will continue to originate large volumes this year and low pricing across core sectors will encourage many to add more risk to their portfolios to generate their desired returns. Meanwhile, with a shortage of prime property available across Europe, investors will resort to building the kind of core properties they want to own. Speculative development opportunities in the most proven locations will, therefore, give lenders the opportunity to lend at higher margins.
2. Whole loan strategies will become more popular: Mezzanine lending returns have come in, meaning those lenders targeting higher-yielding business will turn their attention to issuing whole loans. Borrowers with the need for leverage up to the 75 to 80 percent level are increasingly demanding single financing packages, rather than sourcing a senior loan and then looking for a debt fund to top it up. This means lenders with the capital which allows higher risk origination will act as one-stop-shops to meet sponsors’ needs.
3. Lenders will sidestep shops and shift their focus to beds: Especially in the UK, further administrations in the high street retail sector are likely. Some lenders will take a hit on their retail exposure while many will be reluctant to refinance retail properties as valuations fall. Rather, it is those property types likely to benefit from demographic trends which will attract investor capital and, therefore, debt. Assets such as built-to-rent residential, student accommodation and care homes will be increasingly central to lending strategies, rather than seen as alternative property types.
4. CMBS will be an important distribution outlet for investment banks: Predicting capital markets pricing is dangerous, but the CMBS market played a significant role for investment banks in 2018, allowing higher-yielding loans across several sectors and geographies to be effectively distributed. If pricing remains favourable, banks will continue to put loans into the CMBS market.
5. There will be more M&A activity in the debt space: Last year, Savills Investment Management bought a stake in DRC Capital and Cain International bought a majority stake in Fortwell Capital. Banks have been keen to back niche lending platforms. Expect to see larger players expand in the debt space by acquiring non-bank lenders. Late cycle, the market will favour size.
Those are five of our predictions. But what are you and your organisations forecasting? Tell the author at firstname.lastname@example.org.
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