Vaccine news offers a glimpse of better underwriting conditions

Real estate lenders are greeting the covid vaccine breakthrough with characteristic caution. But it is tempting to consider more favourable financing conditions in 2021.

News of two potentially viable vaccines to combat covid-19 has raised hopes that people will occupy offices, shopping centres and hotels sooner than many in the real estate industry had previously feared.

Some property lenders say they are bullish about property prospects following announcements that US biotech group Moderna has a 94.5 percent effective vaccine and Pfizer and its German partner Biontech have one that is more than 90 percent effective.

But while the news may have led lenders to daydream about a better functioning post-covid market, most remain circumspect. Until there is clarity on the vaccine’s rollout and evidence of it mitigating the pandemic’s impact on the economy, debt providers can be expected to stick with defensive lending strategies.

It is undeniable, however, that the news offers some light at the end of the tunnel. Here are some of the potential implications a workable vaccine would have on the real estate lending market, if it were to be successfully rolled out in Europe in H1 2021.

Income and value would become more discernible: Even a partial return of workers into offices would encourage more real estate trading activity, bolstering valuations and ultimately helping lenders know what their loan collateral is worth. More shoppers in malls would make income streams easier to underwrite besides. However, some questions will take longer to answer, including whether business travel will ever return to pre-pandemic levels, meaning hospitality will remain challenging. While a vaccine could diminish the pandemic’s impact on the best-quality real estate, lenders still have big questions to ponder about the future viability of parts of the market.

Banks’ appetite for new loans could return: An effective vaccine rollout in the first half of next year would help business owners from some of the worst affected parts of the market, such as hospitality and leisure, to weather the crisis. Banks may, therefore, have to absorb a smaller number of defaults than they had provisioned for. This, in turn, could increase their ability and appetite to write new loans. Banks’ growing caution about property lending long predates the pandemic, however, and non-bank lenders, which tend to be more flexible and risk tolerant than banks, will continue to gain market share.

Forbearance discussions may become easier: There has been much speculation that lenders will struggle to stay lenient with troubled borrowers beyond the end of Q1 2021. However, for some sponsors, a vaccine rollout in the coming months could mean the difference between default and the ability to service debt. Improved forecasts in a world with a working vaccine would help borrowers to demonstrate a clearer path forward for lenders’ collateral.

A boost to investors’ confidence could prompt a flight to real estate: The coronavirus crisis has highlighted the need for diversification in institutional portfolios. An improved outlook for real estate markets with the rollout of a vaccine, could prompt a fresh round of investment decisions, benefiting both real estate equity and debt strategies. Market sources predict an increase in the number of investors expanding their real estate exposure globally as they look for another source of downside protection, not to mention yield.