The large quantity of foreign capital crossing into Europe is shoring up the region’s real estate debt market, as investors seek out more creative ways to profit from commercial property.
Competition for European real estate has reached critical mass with a tsunami of capital flooding the market – both equity and debt.
Equity-rich sovereign wealth funds, Asian insurers and pension funds, and North American private equity firms have been steadily increasing their activity in European property markets for several years but, while the region’s banks were busy balancing their books in the aftermath of financial crisis, alternative lenders emerged. Debt funds and insurance companies have developed an appetite for the region’s real estate thanks to the returns on offer, which persistently outpace other investment vehicles.
And this is an accelerating trend. According to JLL, there were more than €30billion in new European debt issuance over the last six months of 2014 and the increasing availability of debt is reflected in the JLL’s London-based debt team’s own database; two years ago there were 15-20 available institutions to place debt financing with but, today, they are in touch with more than 120.
“Increased activity in private equity markets has been paralleled by a willing appetite to lend from both traditional and non-traditional sources of debt capital,” said Chris Holmes, Head of European Debt, JLL.
“Over the last six months both balance sheet and pan-European conduit lenders have increased lending across the continent.”
After an active start to 2015, here are the three standout trends shaping debt deals in Europe.
d alternative lending is set to rise
QE prompts a wave of refinancing
The European Central Bank’s EUR1.1 trillion asset purchase programme, which kicked off in January, has injected unprecedented liquidity into the region and banks are beginning to lend again.
Despite the region’s broader macroeconomic woes – deflation fears and geopolitical tensions in some markets -the low interest rate environment is encouraging many borrowers to refinance and lock in historically low long-term rates.
“European banks are now flush with long term funding, and these asset managers must either return this money to shareholder’s or reinvest,” said Holmes.
Risk appetite returns
The crowded property market has forced prices of core assets up and, while there is plenty of capital available, investable properties are few and far between. This is forcing investors to consider taking on more risk in order to participate in real estate investment.
While lending on safe, low leverage investments remains preferable for the majority of investors, some are willing to explore developments projects in the competitive markets of the UK and Germany, for example, where investable core assets remain scarce.
Strong potential in Southern Europe
Opportunistic lenders and investors are buying up non-performing loans from banks in the region’s most financially distressed markets, showing that even in Europe’s hardest-hit economies, real estate remains and attractive proposition.
“As competition continues to heat up in Europe’s core markets, lenders are gradually looking to fund more opportunities in Italy and Spain.” said Holmes.
A Spanish lender survey, published by JLL in November 2014, found that there have been numerous new entrants to the debt market in Spain over the last 24 months. Italy is undergoing a similar cycle as its banks face increasing pressure to deleverage. In addition, Ireland, and even Greece, is also attracting attention.
Asian investors here to stay
While Asian investors are not strangers to European real estate markets, there is more Asian money than ever targeting investment opportunities across the region.
Established gateway cities are the primary focus for these groups but some of the established Asian pension and sovereign wealth funds are moving beyond the core markets to pursue opportunities in second tier cities.
Alternative deal structures also offering these investors access to the region’s hotly contested real estate assets. In particular, as many Asian investors remain relatively risk averse, mezzanine financing is proving popular as it offers the property exposure without the risk associated with a pure equity play, says Holmes.