“Barring a major shock, European real estate appears on course for another strong year in 2020.”
So read the opening line of an early January 2020 opinion piece in which Real Estate Capital predicted the big trends of the year. In that article, we suggested the biggest things on real estate lenders’ minds would be sourcing residential and logistics lending opportunities, dealing with troubled retail assets, and making sure they kept up with advances in environmental, social and governance matters.
What we, nor most in the industry, foresaw at that point was that early reports of a new virus spreading in the Chinese city of Wuhan would become the defining story of 2020. Indeed, according to a March report by advisor Link Asset Services, based on a January survey of UK real estate debt specialists, only 2 percent believed a global pandemic to be the biggest risk to the commercial real estate market in 2020.
Our January coverage illustrates a European real estate finance industry in an optimistic mood, with no obvious end to the decade’s bull run in real estate markets in sight.
The Q1 sentiment survey compiled by industry body the Commercial Real Estate Finance Council Europe highlighted the positive mood. Writing in Real Estate Capital, CREFC Europe industry initiatives director David Dahan said the survey was conducted against a backdrop of renewed optimism in the UK business community following the country’s general election. He wrote: “There are still risks that could derail 2020, such as global politics and economics, and the coronavirus. But for now, as one participant said, the ‘post-UK election honeymoon effect will be positive’.”
By February, concerns about the spread of the virus were growing. On 29 February, the organisers of MIPIM, the annual gathering of the real estate industry in Cannes, France, announced the event was to be rescheduled to June. It was a major disruption to the real estate industry calendar. Of course, the event was subsequently to be cancelled. By March, as the coronavirus swept European countries, leading governments to implement strict lockdowns, most real estate finance specialists realised that Europe’s property markets were experiencing their biggest disruption since the global financial crisis of 2007 and 2008.
On 19 March, we published a comment piece outlining how covid-19 threatened European real estate finance: including the prospect of a global recession after a decade of benign conditions, disruption to almost all property sectors and the likelihood of a fresh wave of loan defaults. It became one of the most-read articles we published this year.
In the US market, Tom Barrack, property tycoon and chief executive of manager Colony Capital, warned that the country’s commercial mortgage market was in danger of collapse if bank lenders, which fund US non-bank lenders through credit lines, did not grant leniency. To mitigate the effects, he called for the roll-out of “a menu of comprehensive financial subsidies, regulatory reliefs, forbearances, liquidity support and monetary time outs for the monetary obligations” for those impacted by the shutdown.
Across both the US and European real estate markets, tenants began to request forbearance, with tenants submitting force majeure notices to their landlords. In March, the UK government introduced a moratorium on evictions of businesses affected by covid-19. With landlords faced with a lack of income from their properties, many requested leniency from their lenders – and as we wrote in April, debt providers proved willing to work with their sponsors to mitigate the effects of the pandemic.
“From here on, it’s all about working with our sponsors and helping to provide flexibility where required,” commented one lender at the time, Sam Mellor, head of Europe and Asia-Pacific real estate debt at Barings Real Estate. However, he added that Barings would also look for “reciprocal interactions by way of fresh equity – when available – and timely, proactive actions and reporting”.
In April, we wrote that the focus of the crisis within real estate was shifting to lenders. With the pandemic having shuttered many previously performing real estate assets, real estate debt providers were left to ponder how best to avoid defaults occurring across their portfolios. For most, the answer was to cut their sponsors some slack, and hold out for better market conditions.
By May, debt specialists were bracing themselves for a rise in forbearance requests ahead of the upcoming quarterly rent and interest payment dates in June and July, as they began to count the cost of properties being shuttered since March.
Meanwhile, investment banks’ activities were hampered by a slowdown in syndication activity, which left some lenders holding more debt on their balance sheets than they had planned for. “There is still a market, but banks have all had to take time out to work out how to handle the covid-19 crisis,” Norbert Kellner, head of syndication at German mortgage bank Berlin Hyp, told us at the time.
Those organisations that had spent the cycle buying Europe’s non-performing loans in bulk and making a profit by working out distressed situations, also came into difficulty. The uncertain outlook for European property markets left those private equity firms that had bought NPLs in 2019 with obsolete business plans.
“Many who acquired NPL portfolios in the last couple of years will be under pressure,” Jacob Lyons, co-founder of principal investor and capital markets advisory firm Rivercrown, which itself invests in NPLs, told us at the time. “They may now face radically different outcomes to what was underwritten in their business plans.”
Lyons’ firm was among those raising capital to deploy in a dislocation financing market. In June, Rivercrown announced a new special situations credit vehicle. In an announcement, the company said it was seeing a wealth of opportunities across property sectors, often in cases where there is a funding gap combined with an element of “short-term, situational distress”.
A June survey by consultancy Savills highlighted the dislocation in the property lending market. Real estate debt, respondents said, had become scarcer, especially in Europe and North America. In total, 58 percent of respondents to the survey said real estate debt has become less available and on worse terms.
The second part of ‘The story of 2020’ will be published on 22 December.