Adapting to change might be difficult, but real estate lenders cannot ignore the advances taking place across their sector. Delegates at the Commercial Real Estate Finance Council Europe’s Autumn Conference in London on 20 November had the chance to hear about the factors that will shape the future of real estate and those lending against it. Here are three actions discussed at the event we think lenders should take to get ready for what is coming:
Catch up with the proptech reality
Technology is changing the real estate industry and lenders should be on top of this to make better-informed decisions. Although it might seem a long way from being the norm, the use of 3D printing, for instance, has the potential to revolutionise traditional construction. David Moloney, a director at consultancy firm PwC UK, who helps organisations navigate disruptive technology, cited claims by the creator of the world’s first 3D-printed office, which said the process generated 60 percent less waste, decreased production time by 70 percent, and cut labour costs by 80 percent.
Artificial intelligence is being increasingly used in business software to improve the efficiency and productivity of real estate, added Tanguy Quero, from JLL Spark, a strategic venture capital platform which invests in technology companies transforming commercial real estate. The start-up Skyline AI, for example, is partnering with real estate players to establish investment vehicles within the multifamily sector in the US. Their machine-learning algorithms identify optimal risk-reward adjusted investment opportunities, both on and off market, he said. Understanding such uses of proptech will be crucial to lenders’ underwriting in future.
Study the changing dynamics in the use of space
In the office sector, co-working spaces are set to increase worldwide to 26,000 by 2022, up from around 2,000 in 2018, Carissa Kilgour, founder of advisory firm Co.lab, noted. As people move from corporate spaces to a more informal way of working, the rise of co-working and flexible office models will be the new normal, she said.
Helen Causer, office and investment lead (King’s Cross) at developer Argent, argued one of the misconceptions in the flexible office space is it is used only by start-ups. Big corporations are now using it as a “really important” part of their occupational strategy, she added. For lenders, it is crucial to consider how best to structure finance against such uses of space. Lenders should also note the changing opportunities in retail. Repurposing was cited as a solution to rising vacancy in the UK, where there is too much retail density.
Adding leisure and entertainment to shopping centres is another strategy to offset declining consumer confidence. According to a study conducted by retail asset manager Ellandi and consultancy firm Knight Frank, which surveyed 9,500 shoppers in 30 locations across the UK, shopping centres with leisure and entertainment offers increase retail purchases by 15 percent and spending by 32 percent.
Prepare for the end of LIBOR
With LIBOR due to disappear from the end of 2021, lenders are “running out of time” to transition to a new landscape of alternative interest rate benchmarks, said Richard Gibbard, senior lawyer at Fieldfisher. In several jurisdictions, working groups have identified risk-free rates as an alternative. The recommended replacements, such as SONIA – the Sterling Overnight Index Average – which recently featured in a loan provided by Deutsche Bank, are perceived as more reliable because they are based on market transaction data and do not require judgment-based submissions.
Most lenders operating in the UK are still referencing LIBOR when writing real estate loans. However, they need to accelerate preparations for the transition to risk-free rates in order to diminish operational risks in two years’ time. The best way to do this, Gibbard said, is to stop writing loans with LIBOR, but lenders need first to create the right products and documentation, to be part of a full-scale roll-out of SONIA in the loan markets.
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