The results of the second quarter sentiment survey conducted by CREFC Europe of its members suggested a somewhat stable mood among European real estate debt market participants. All eyes were on how central banks would move interest rates, but the results suggested few were much more positive or negative than in Q1.
This time round, in the property finance industry body’s Q3 survey – conducted between 12 July and 7 August – respondents were more negative in their outlook. CREFC Europe’s industry initiatives director, David Dahan, believes the deterioration in the mood is due to a growing expectation that rates will stay higher for longer.
“I think the number one issue is the economic environment,” he says. “There is a definite deterioration in sentiment and my conclusion is it is about expectations for rates. There had been a sense that rates would peak in mid-2024 before starting to come down. Now, while expectations about the timing of the peak might not have changed, there is a perception the peak will last longer.”
CREFC Europe calculates a sentiment index score, factoring in positive and negative responses, to provide a single data point per question, which can be tracked across quarters. In Q3’s responses to questions about market conditions, Dahan explains the deterioration in sentiment index scores was due to fewer positive responses. “There was a small uptick in the number of negatives, but the reduction in positive responses meant the index deteriorated,” he says.
One area where sentiment deteriorated was views on the strength of existing loan portfolios. “This was most pronounced in responses from the UK. Whereas 10 percent of respondents previously thought the existing loan book was generally resilient, in Q3 basically nobody said that. Last quarter, 60 percent of UK responses to that question were negative. Now, 75 percent are negative.”
For new loans, albeit rarer in today’s market, respondents indicated terms are more lender friendly, with loan-to-values reported to be coming down, and interest coverage ratios rising. “The percentage of people who saw LTVs decreasing went from 44 percent last quarter to 63 percent this quarter,” says Dahan.
By sector, sentiment towards offices remains lowest, with Dahan noting six consecutive quarters of negative sentiment towards the sector.
CREFC Europe also polled members about where on the risk curve they view optimum risk-adjusted returns, when considering quality of asset, location and type of loan. “There has definitely been de-risking in the market since the end of 2021,” says Dahan, “although there is a moderate uptick in people saying they see better risk-adjusted returns slightly higher up the risk curve when it comes to type of asset by quality. I wonder if this is connected to comments in the market about emerging opportunities, for those that know what they are doing.”
However, respondents continue to view lending lower down the risk curve as optimal, when it comes to location of asset and type of loan, with senior debt viewed as a better investment in today’s market than higher-yielding lending.
Describe in a few words how you feel about the market
Staying alive ‘til 2025
Cautious with super focus on location and sustainability of underlying income drivers
Some clarity returning to markets as inflation headline numbers start to move down but some uncertainty remains
Difficult times persist. Property sales are inevitable as loans fall due for repayment/refinancing in the autumn
Volatile, uncertain, but great potential
Lack of activity reflects huge uncertainty on many levels, eg, property prices and cost of debt. No end soon so may be time for cutbacks from bigger lending teams
Values are adjusting downwards by necessity to allow for dealflow to increase. Huge opportunities in store for the weight of distressed loans about to become prevalent in the market
Ran off the cliff-edge a while ago, yet to look down…
Increasing opportunity for debt funds
Problematic! ICR and LTV covenants are breaching and loans are maturing with no source of refi. This will lead to asset sales and accelerate price discovery, potentially leading to lower valuations