The covid-19 crisis has forced lenders to become far more risk-averse, banks are limiting business to core clients and assets, and there is a growing polarization between funding opportunities for well-located, income-producing properties and the rest of the market.
These were among the conclusions drawn by European real estate debt specialists speaking at the Commercial Real Estate Finance Council Europe’s Autumn Conference 2020, held virtually on November 4 and 5. But as well as talk of increased caution, there was also a focus on the opportunities ahead for debt providers. Here are some of the major talking points from the event.
Construction finance is a way to ‘look through’ the crisis: Although financing development is usually seen as a risky activity, conference delegates heard it is an effective way to make sensible choices about future demand for real estate amid uncertain market conditions. Unlike in the last crisis, oversupply is not a significant factor. By backing the right development project, lenders can put their capital to work in sectors likely to be most resilient to the pandemic and in locations where supply of stock is most needed.
Appetite is heavily skewed towards pandemic-proof sectors: Panelists agreed credit is available to finance new schemes. However, the availability of finance varies hugely by sector. While banks remain willing to lend up to 60 percent loan-to-cost and debt funds up to 65 percent, according to one panelist, their appetite is skewed towards residential assets including build-to-rent apartments and logistics, including last-mile facilities.
Shops and hotels are not off the table: Although it is difficult to be too bullish on retail, it is clear not all parts of this unloved sector are being vetoed by lenders. Grocery-anchored schemes are considered relatively desirable, and retail warehouses are expected to outperform conventional retail by benefiting from the growing click-and-collect trend. There was also cautious optimism on hospitality. Nobody expects a return to pre-pandemic performance until at least 2023-24. But that has not led all lenders to retrench. Panelists expect there to be opportunities for sponsors to acquire good-quality assets at attractive prices, creating lending opportunities.
Flexibility is one certainty about future offices: A big question mark remains on how the pandemic will ultimately affect structural demand in the office sector. However, greater flexibility will be the norm for both employees and office building tenants, with an increase in tenant demand for more flexible lease terms noted by panelists. Demand for prime city center headquarters subject to long-term leases is not expected to disappear. But a reduction of tenants’ footprint in this type of space and the potential replacement of any additional need for space with co-working facilities, featuring shorter term and more flexible leases, is considered a plausible scenario.
Covid-19 is forcing people to think strategically and collaboratively: The pandemic has upended previous assumptions about property sectors, meaning investors and lenders are thinking hard about how real estate can be adapted to the structural changes underway in the market. And despite covid-19 creating testing scenarios for lenders and their borrowers, several panelists remarked on the collaborative approach both sides of a loan deal are taking when issues arise. In an industry in which lenders and borrowers have been known to be adversarial in past cycles, this crisis has encouraged deal participants to work together to tackle problems caused by the pandemic.