The mood at MIPIM, which took place in Cannes this week, was perhaps lifted by the beautiful weather on the French Riviera. After wind and rain subdued the atmosphere at 2016’s gathering, this year’s property fair was bathed in sunshine.
It’s tempting to make the weather a metaphor for the tone of the real estate market, but the reality is that while many of the property people gathered along Cannes’ Boulevard de la Croisette put forward a positive argument for the fundamentals of the market, there is still an awareness of where we are in the cycle and the need to be cautious.
On the fundamentals, a sentiment repeated by many was that the weight of capital focused on Europe’s real estate markets remains immense.
Data unveiled at the event by Cushman & Wakefield showed global real estate capital actually dipped slightly in 2016 – for the first time since 2011 – but with interest rates still low, fixed income investors remain keen to benefit from the steady and competitive returns the market generates.
Finding the right investment opportunities is the challenge. Many sectors across Europe look fully-priced and opportunities for value-add plays are difficult to source. A major MIPIM theme was that there is plenty of capital in the sector, but spending it is getting more and more difficult.
Most were keen to stress that the real estate finance markets are liquid. Bankers and insurance lenders made known their healthy 2016 lending volumes, while reminding listeners that risk parameters were not compromised to achieve them. Debt fund lenders explained that investors want continued exposure to property debt.
As for where we are in the market, lenders at MIPIM agreed that it is almost at the top or even slightly over the peak. Certainly, European real estate is late-cycle, but few were prepared to estimate just how long the period will last.
There is a sense that although it is difficult to envisage prime yields compressing further, it is reasonable to expect some further growth from the income element of returns. Tight supply of prime stock in several European cities ought to allow for more rental growth in the next year or two, many hope.
All this means that most real estate lenders are determined to continue to write new loans and build portfolios. With investors still hungry for product, no banker wants to apply the brakes sharply and give up market share, income and longstanding clients.
That said, there is a sense of caution and most lenders are continuing their origination activity with an awareness that the market could change by the time current loans need to be refinanced.
“If lenders ignore where we are in the cycle, that’s when there are problems,” one banker said.
Everyone has an eye on what will happen to interest rates and how Europe’s politics will play out this year – potentially triggering a decline in values – so the result of the Netherlands’ election came as a relief to many. But although politics and macro-economics came up in conversations, many conclude that it is almost impossible to predict the future. Perhaps a degree of uncertainty-fatigue has set in.
The real estate lending market is in better shape than it was at this point in the last cycle, when MIPIM was more lavish and less business-like than today. Leverage is generally lower, there is more equity at work in the market and underlying sectors are stronger.
The message from lenders is that they will continue to lend while the market fundamentals make sense, but they are mindful of a time when those fundamentals could look less favourable.