Property debt specialists we have spoken to in the last few weeks describe a European real estate lending industry on pause. Although most lenders remain well-capitalised, pricing risk is still an almost impossible task as the covid-19 crisis ravages the global economy.
During this time, Real Estate Capital has been striving to make sense of an uncertain and fast-changing situation. All our coronavirus-related content can be found on our dedicated page. Here are 10 of the key points of our coverage so far.
1. Interest payment holidays may be necessary: Property owners have been hit by reduced rental payments. As one debt market source suggested, if borrowers are upfront about their situations and how they hope to resolve them, many lenders are likely to grant interest payment deferrals this month.
2. Lenders will favour a collaborative approach: Several lenders we spoke to said they are willing to engage in dialogue with sponsors struggling to meet debt obligations. Loan-to-value and interest-coverage ratio tests are areas in which some expect to see short-term flexibility.
3. It’s time to get familiar with loan docs: Although many expect to see cooperation between lenders and borrowers, one lawyer we spoke to warned that financing parties need to be clear on their legal position as they enter negotiations. That means revisiting loan documents.
4. Force majeure is on people’s minds: Provisions in contracts relating to unforeseeable events are “top of mind” for lenders, landlords, tenants, borrowers, contractors and developers, one lawyer told our sister title PERE.
5. Stimulus measures could bolster real estate markets: Government measures, such as the UK Coronavirus Act, will play a role in preventing distress in the real estate industry, PERE argued.
6. European CMBS face a short-term liquidity challenge: According to S&P Global, interest payment shortfalls have the potential to impact Europe’s commercial mortgage-backed securities market, although the rating agency believes existing transactions are equipped to deal with such stress.
7. The coronavirus is private real estate debt’s first true test: Europe’s alternative real estate lending industry emerged in the wake of the last crisis and has enjoyed benign market conditions. The covid-19 crisis is its first major test, although one market watcher argued that conservative lending practices should stand it in good stead.
8. Operational property sectors are taking the biggest hit: Europe’s retail and hospitality sectors were cited by Swiss financial services group UBS as among the four global real estate sectors hardest hit by the pandemic.
9. ESG is in danger of slipping down the agenda: Sustainability has been displaced by covid-19 as the real estate industry’s major talking point of 2020. One environmental, social and governance specialist argued that building sustainability into financing deals is a form of risk management.
10. The need for data centre finance could increase: Many expect this crisis to accelerate changes in the way we use real estate. One niche property type tipped by some as playing a greater role in future is data centres. It is argued that if lockdowns encourage more long-term working from home, increased internet usage will boost demand for such facilities, along with opportunities to finance them. PERE will explore the allures and challenges of the sector in its May cover story.
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