As lockdown restrictions ease further across the UK, with pubs and shops in England being allowed to reopen from 12 April, UK real estate financiers are looking at property lending with cautious optimism. Most are willing to take advantage of a real estate recovery but remain wary about market conditions. For more on that, and the rest of the past week’s most relevant happenings, read on.
Lenders want to lend (cautiously):
The results of the latest survey of property lenders active in the UK by advisor Link Group suggest debt providers want to write new loans in 2021 but remain concerned about the pandemic’s impact on market conditions and the wider UK economy.
Almost two-thirds of respondents to the January survey expect loan origination to increase in 2021, with more than half expecting their teams to grow. Tim Schuy, Link’s head of real estate finance, referred to a bullish mood among lenders. “Everybody we spoke to is ready and gearing up for the recovery,” he said.
However, the survey results suggest lenders are keenly aware of the risks of providing finance during a persisting pandemic. A third expect a decrease in loan-to-values in new loans, while interest coverage and debt service coverage ratios are on the up as lenders become more stringent on covenants. Schuy also noted that most lenders responded to covid by maintaining the pricing of their capital under management but stepping down the risk curve in their lending strategies.
While lenders clearly want to lend in 2021, they can be expected to do so on cautious terms.
Barings expands capital sources with new mandate:
The £250 million (€290 million) real estate debt mandate secured by the US-headquartered investment manager Barings from the UK insurance provider The Phoenix Group is a testament to the increasing appeal of debt among institutional investors.
Speaking to Real Estate Capital after agreeing to the Phoenix mandate, Sam Mellor, head of real estate debt for Europe and Asia-Pacific at Barings, described a market benefiting from a growing appetite for the asset class from insurance companies. According to Mellor, real estate debt has a particularly attractive risk-return profile for institutional investors, as it meets their needs for returns in line with their liability structures and portfolio diversification objectives. “Investors are looking for yield, and some insurance companies, including Phoenix, are making investments that match their regulatory capital requirements while providing them with attractive yields, which is why senior mortgage real estate lending is a very attractive product for them now.”
AXA doubles down on offices:
The strategy of the €800 million development fund for which AXA IM Alts announced a first close last week demonstrates how one of Europe’s major real estate managers – which is also a key debt provider – is thinking about the property industry’s future. The “develop-to-trade” strategy will target long-term capital appreciation through the construction of income-producing assets in locations with proven market liquidity and where infrastructure improvements are due.
AXA has identified two target sectors for the vehicle: residential, which is in most managers’ sights, and offices, which tends to divide opinion. AXA argues the pandemic has led to a polarisation in favour of prime, new offices that provide the flexibility and high specifications required by occupiers. Its residential development activities, meanwhile, will partly be focused on converting old office stock that does not meet today’s end-user standards.
Although future patterns of demand for office space remain unclear, AXA clearly believes a new generation of workspace is required across Europe’s key cities.
Lenders gear up to finance non-core logistics:
The latest financing provided by the German bank pbb Deutsche Pfandbriefbank in the logistics sector shows lenders’ growing willingness to finance sheds in non-core European markets. The lender has provided a €115 million investment loan to a fund managed by Ares Management Corporation to finance the acquisition of a logistics portfolio in Poland, comprising four newly built Class A warehouse assets spread across the country.
That debt providers are increasingly looking outside the most competitive markets for logistics lending opportunities has been recently echoed by market participants. Mike Shields, ING’s EMEA head of real estate finance, told Real Estate Capital last week that the intense competition for logistics financing had led to a reduction in loan pricing, which was getting tighter in non-core European markets. “Competition is getting so hot in core markets like Germany, France or the Netherlands that lenders are starting to move into countries that had traditionally presented some structural barriers to them.”
Location aside, lenders should expect a strong pipeline of financing opportunities across the sector, given the solid underlying demand from property investors.