Where will the financing mandates come from?

An expected increase in acquisitions gives lenders hope that financing mandates will follow

The volume of European real estate investment was around €51 billion in Q2, a 30 percent drop on the second quarter of 2019, according to consultancy Cushman & Wakefield. But as lockdowns have eased across Europe, a reported uptick in activity is providing lenders with the prospect of more transactions to finance.

“Supply on the investment side has been under pressure, with too little stock to keep investors happy,” says David Hutchings, Cushman’s head of European investment strategy. He predicts that stock will gradually come to the market as owner-occupiers unlock capital through sale and leasebacks, property companies strategically sell out of certain sectors, and lenders force sales. However, he expects 2020’s volumes to be 35 percent below 2019’s – and significantly lower if there is a return to widespread lockdowns.

He adds that, for now, buyer and seller price expectations are slowly converging: “Three months ago, investors would speak of a 25-50 basis points shift in pricing. Now, it is more like 10-20bps.”

Larry Young, head of the international investment group at consultant BNP Paribas Real Estate, says pricing for core, centrally located property has only moved by around 5 percent since the onset of the pandemic. However, he adds: “Finding consensus in non-prime or value-add is more complex and some of those deals have stopped.”

Prime movers

Sources note a focus on prime property, which they describe as a flight to quality in uncertain times. Julian Sandbach, head of central London capital markets at consultancy JLL, says several sales processes that were put on hold in March have since been revived, and at similar pricing levels: “Vendors of this type of product are being resilient around pricing and are not prepared to negotiate any meaningful discounts.”

Sandbach says yield compression in key continental cities means there is an arbitrage with prime London property, making it attractive to international investors. In a July report, JLL identified £3.8 billion (€4.2 billion) of London office transactions under offer, with more being prepared for the market.

Across Europe, offices have remained popular with buyers, despite uncertainty around the future of workspace. Data from agency Savills show offices accounted for 31 percent of Q2 investment, at €16.1 billion.

Just as buyers are focusing on core product, so are lenders, says Maud Visschedijk, Cushman’s head of EMEA debt and structured finance. She says they are seeking “long income and preferably residential, logistics or core offices. This means there is increased competition among both lenders and investors for the same product.”

Most of our sources say they do not see immediate signs of distressed sellers adding to the supply. “Investors are generally 50-60 percent leveraged, compared to 70-90 percent after the global financial crisis,” explains Young. Nor do sources see emergency sales, such as those that occurred in the UK in the wake of the June 2016 Brexit referendum, when some of the country’s property fund managers were forced to sell to cover redemptions.

If the Q2 trend continues, domestic buyers will prop up Europe’s key markets. As soon as lockdowns began in March, many crossborder capital providers “put their pens down” says Young.

Although investment in European real estate has been a global affair for several years, data provider Real Capital Analytics notes that overseas investment by non-European property investors was down 40 percent in Q2. Asia-Pacific investors, which boosted volumes in markets such as Paris last year, are expected to be relatively absent from the market during 2020.

Hutchings points out that practical restrictions on travel, such as quarantine measures, mean global investors without a base in Europe will face difficulty deploying capital in the near term. “The appetite for Middle Eastern, Asian and North American capital in Europe is just as strong,” he says. “But they cannot see how they can deploy that money, unless they already have a platform or a local partner.”

In the wake of the global financial crisis, opportunistic US capital managers deployed large sums in Europe to take advantage of low pricing. Sources say such managers are currently active, though not on the same scale as in 2007-08.

Opportunistic knocks

“Opportunistic private equity managers are finding targets in Europe, with retail and hospitality being the most obvious opportunities – but not necessarily at the right price,” says Hutchings. However, with yields having moved out by 100bps in such sectors, he says such opportunities are more attractive to these investors.

In recent years, amid late-cycle conditions, European real estate also saw large-scale merger and acquisition activity and platform transactions. Raj Somchand, lead director in JLL’s EMEA corporate finance team, thinks there will be more of these deals: “In the current climate, the biggest change to M&A transactions will be the increase in activity driven by the need for liquidity and balance sheet repair.”

Rather than lots of M&A activity, Young expects to see more large-scale sale-and-leaseback deals in segments such as supermarkets, logistics and healthcare.

Although an increase in investment activity is expected, sources expect any rally to appear modest when compared with last year. In June, Savills predicted that 2020 European investment would be down 34-52 percent to between €125 billion and €170 billion – not as sharp a reduction as the 54 percent witnessed following the global financial crisis.

Property owners that hold, rather than sell, assets will need to refinance. This means lenders will not be wholly dependent on a spike in investment to drive business. A large number of 2015 vintage loans are due to expire this year and there will be plenty of instances where incumbent lenders decline to refinance properties or offer significantly lower leverage and higher pricing, thereby forcing sponsors to look elsewhere.

Edward Daubeney, senior director for EMEA debt and structured finance at JLL, says he is seeing a 50/50 split between refinancing and acquisition financing mandates across the debt market, including for logistics, residential and office assets. He adds that lenders remain keen to win such mandates: “There are a healthy number of lenders who are active again, albeit quoting a bit more conservatively and at 5 percent lower leverage.”