Sentiment survey: What the market really thinks

Welcome to the CREFC Europe Quarterly Sentiment Survey for Q1 2019, provided exclusively to Real Estate Capital.

The commercial property lending market has grown more diverse in recent years but remains largely private and opaque. In order to provide insight into a sector crucially important to economic activity, investment and financial stability, CREFC Europe has launched a quarterly survey of its members.

The survey was sent to the key contact at every firm in CREFC Europe’s membership, with each organisation permitted to designate up to two additional respondents. Although the survey was anonymous, information was collected on the type of firm to aid analysis and classification.

Around half of respondents indicated their firm is UK headquartered, but a large majority defined their firm’s focus as multi-national, European or global, and a wide range of lending strategies and lender types, as well as advisory roles, was represented in the survey. CREFC Europe believes respondents account for an aggregated commercial real estate loan book of well over £100 billion (€114 billion).

MOOD OF UNCERTAINTY

The results of the first CREFC Europe Quarterly Sentiment Survey show Europe’s real estate debt professionals are uncertain about the future, writes Peter Cosmetatos, chief executive of CREFC Europe.

The inaugural edition of our market sentiment survey was conducted during January’s political and market turmoil. Unsurprisingly, ‘uncertainty’ and ‘caution’ were terms that featured heavily in how respondents described their mood. Brexit plainly contributed to the almost universal view that the political environment has grown more difficult for lenders.

At a time widely seen as late cycle, the overall impression is of a sober industry monitoring worsening market conditions: financial covenants were broadly unchanged from a year ago, and commercial real estate debt availability was expected to remain at broadly similar levels. Not a single respondent saw significant improvement in real estate fundamentals, capital liquidity, margins, lending terms or the political, economic or regulatory environment. Responses skewed towards deterioration in all those areas.

In this environment, debt funds were the lender type most widely expected to grow over the next year, followed by insurance companies and pension funds; commercial banks were the least likely to see growth.

In terms of sub-sectors, the negativity expressed about retail was overwhelming – everyone was ‘pessimistic’ or ‘very pessimistic’ except for 5 percent who expected no change. There was an interestingly positive consensus around the private rented sector/build-to-rent/multifamily and, to a lesser extent, alternatives (healthcare, senior living, etc) and student accommodation.

Against that backdrop, respondents were asked where they saw the most attractive risk-adjusted returns in terms of asset type, asset location and lending strategy. While responses generally clustered around the centre ground, commercial banks generally preferred the lower end of the risk spectrum, while lawyers and, to a lesser extent, investment banks and debt funds were more interested in the higher end.

Also, where higher risk/return approaches were viewed positively, the focus was more on higher risk assets than on higher risk locations or, reassuringly in terms of lender discipline, lending strategies. That may bode well for the availability of credit for construction and transitional assets, but it leaves a question mark hanging over the financeability of regional assets.

Finally, around two dozen respondents stated that their firm provides loan-on-loan finance. Anecdotally, this has been a growing feature of the overall market, as debt funds have increasingly used fund-level leverage, secured on loans or loan portfolios rather than real estate, to enable them to offer the pricing required to win deals while also delivering the returns their investors expect. While many banks see this as an interesting form of exposure to commercial real estate, we understand that neither for regulatory capital nor for reporting purposes is it treated as commercial real estate debt.