Market confident on future of real estate finance
Investment professionals unanimously back the future health and role of real estate finance in a report published by international law firm Berwin Leighton Paisner (BLP).
Banks, insurance companies and private equity firms describe the investment landscape in 2012 and universally stress the resilient and long-term nature of real estate, thus underpinning future confidence in the sector.
Lenders and borrowers also point towards a back-to-basics approach to finance, with a re-focus on the underlying asset rather than an over-reliance on complex structures. The full report – “Real Estate Finance: Financing the Future” – is based on interviews with senior executives at organisations including Aviva, Barclays, Blackstone, HSBC, ING, M&G Investments and Macquarie.
Laurence Rogers, partner and head of real estate finance at BLP, says: “We all know how tough the market has been, but these findings prove that lenders and borrowers remain fully committed to real estate. New conditions have led to a focus on simpler financing, while new players have joined traditional lenders in the bidding wars. While there are no signs of any return to the old culture of financing, what is clear is that property remains a formidable and fundamental asset class.”
Lenders that remain in the market proclaim their commitment to the sector – for some banks it is about being part of the full service offering to clients, while all respondents recognise the benefits of long-term resilience in what is a cyclical market.
Brendan Jarvis, head of real estate, Barclays, says: “Real estate is a resilient asset class over a period of time and almost everyone would agree that it is a cyclical business. And of course the best time to lend in property is when liquidity is poor and value low. Regulations to a certain degree have been factored in since the credit crunch, but now it is not so much pricing but availability. Yes there is a rich cocktail of distressed debt and increasing regulation, but people are still keen to be in the real estate market.”
Respondents view today’s market as being characterised by less complex deals, with a greater focus on the underlying real estate asset. Investors now look for returns through asset management, rather than just financial structures. Synthetic and multi-layered transactions have largely been replaced by simplified structures which can be more easily assembled and taken apart.
Andrew Appleyard, head of specialist real estate funds, Aviva, says: “Simple loan structures are best and this works for people who are risk averse. The ability to understand what you have actually done in a financing is going to be paramount.”
Levels of lending are expected to remain flat over the next three years, according to the majority of participants, who also expect market conditions to recover in the longer term.
New market entrants are filling the gap left by traditional lenders and legacy-free firms are well-positioned to move into the vacated space. But broadening the mix of lenders to include insurers and pension funds now focuses certain lending on specific asset types with longer terms. Respondents warn that this could lead to over-supply at the top-end, reducing flexibility within the financing.
Anil Khera, Blackstone, says: “Increased participation from non-banks is welcomed, but it needs to target underserved areas, not just saturate the already functioning prime core markets. Senior debt funds could bring liquidity to the starving secondary markets and mezzanine funds help banks take lower risk positions while allowing sponsors to achieve the required leverage levels to transact.”
The UK and London in particular remain very attractive to investors given this mature market’s better liquidity, more consistent yields, global financial strength, transparent legal system and superior rental growth potential. That said, respondents urge clarity over what is characterised as prime.