CREFC: Industry upbeat on European commercial property lending for 2018

By Kasmira Jefford - Wednesday, September 13, 2017 14:09

Germany, Italy and France have been active markets for commercial real estate lending in 2017, with the trend expected to continue next year, according to industry experts.

At a CREFC Europe morning seminar, held at law firm Allen & Overy’s City headquarters yesterday, panellists discussed lending activity in Europe, the drivers in each jurisdiction, and the opportunities and challenges for investors.

The event explored key jurisdictional differences and the implications of each from a legal and practical perspective, such as leases, ability to access collateral and enforcement regimes.

Panellists David Butler, a director at Deutsche Bank, Britta Drexler, senior vice president at Eastdil Secured and Stephanie Shelmerdine, vice president at Royal Bank of Canada were unanimous in their view that the market had yet to peak, with Drexler anticipating a continuation of the current trend for the next 12-24 months.

Drexler added: “All types of money are active at the moment. Given the low interest rate environment and deep liquidity in the debt market, all cash-on-cash and IRR targets can be realised.”

Student housing and hospitality, particularly in the UK, remain one of the most attractive asset classes as well as logistics, led by last mile delivery hubs. The Private Rental Sector is also attracting more attention, with lenders now working to find a way to devise suitable finance structures, Shelmerdine added.

Giving his views on the German real estate finance market, Dr Olaf Meisen, a partner at Allen & Overy based in Frankfurt, said one of the key characteristics was the high level of competition in the market and the access to cheap financing. The market continues to be dominated by German Pfandbrief banks – either as originators or as a syndicate member - primarily due to their cheap refinancing base through the issue of covered bond (Pfandbrief).

Other lenders include international banks, which compete well on size, speed and complex deals. Insurers have also been active and can also offer competitive prices. However they tend to look for long-term deals with less administration efforts.

Meisen said senior and mezzanine structures were becoming increasingly popular, as is development financing, however senior loans for Pfandbrief refinancing remain the most common as it offers the most attractive pricing. Meanwhile international banks typically like to retain the flexibility to originate loans for Pfandbrief bank syndication or for CMBS exit. He concludes that Germany remains one of the preferred jurisdictions for investment in Europe thanks to favourable macroeconomic data and its reliable and predictable legal framework.

Pietro Scarfone, a partner in Allen & Overy’s Milan office, said Italy also remained a very active market and has enjoyed recent growth but cautioned that there remained structural issues that needed to be addressed.

Institutional lenders such as funds and insurance companies have also been increasing their presence, particularly in the secondary market. And despite turmoil in the local banking sector, several Italian banks remain keen players in the market, although traditionally taking a buy and hold approach.

The government recently introduced regulatory and tax reforms to promote competitiveness for both Italian and international investors, however Scarfone said the full effect of these changes was yet to be felt.

“The market is there, players are willing to enter the market, but there are areas that need to be looked at,” he said. “There has been stimulus brought in – not all of them working as predicted – but some of them making it easier for lenders.”

Regulatory obstacles for non-Italian lenders include the need to hold an Italian banking licence or EU passport to be able to lend to Italian businesses. From a tax perspective, Scarfone said: “The cost of security could be a killer for any deal unless you can qualify for a regime called Imposta Sostutiva.”

However he argued that with the right advice, these limitations were not preventing deals from happening. “The landscape in Italy is changing and there is a clear wish to make the real estate industry better and easier”.

Moving onto France, Caroline Delavet, Allen & Overy counsel based in Paris, described the lending environment as very competitive and dominated by local French banks as well as German banks, who have made an aggressive return to the market since years of the financial crisis.

Caroline Delavet said that knowledge of the French market, relationships with local players, and competitive pricing were key to success, making it hard for new entrants in the market to compete. Indeed, with margins becoming lower and lower on core assets existing local lenders are now turning to riskier deals, like development financing, in search of yields.

The other factor that makes France particularly competitive is that demand is concentrated on Paris and the surrounding suburbs. The majority of assets (other than logistic assets) that are financed in France are located in the capital.

“It will be very interesting to see that relationship between local players and international banks [unfold] and whether the leverage is going up,” she said.

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