The State of Real Estate Finance
UK Real Estate
According to the latest report from commercial real estate company CBRE, real estate financiers are looking to de-risk. Continued uncertainties over Brexit and rising rate expectations have had a negative impact on real estate equities. For wider equity valuations there is some incongruity between the optimism and pessimism reflected more readily in the markets than the underlying worth as has long been recognised. The real estate sector is one that is economically exposed and has therefore been more closely correlated with its assets and has suffered accordingly, particularly those companies whose value is predicated on rising values or those with exposure to central London. This is likely to remain the case according to CBRE with the indefinite courses of the European political calendar, Brexit and the stance of US policy.
Net Asset Values have been revised downwards and open-ended balanced funds are trading at near parity, while discounts have expanded for REITs. The only exception to the rule is property connected with social infrastructure; student housing, healthcare et al which is showing resilience due to being at the more defensive end of the spectrum. There is no forecast for a change in supply and demand in 2017 but it is likely that market fundamentals will make it harder for managers to create more units at an offer price premium. Thus prices are likely to be affected.
Government debt and inflation expectations are more factors that are influencing the real estate sector. There has been a recent shift in expectations to a fiscally generated reflationary world from the previous low growth environment. However, the borrowing outlook is still positive with interest rates at historically ultra-low levels and it seems likely they will stay so even if inflation does take hold. In addition to this longer term bond issuances have been locked in at low borrowing rates by UK and European REITs.
For private debt, traditional UK lenders have sustained an appetite for loans on prime assets and pricing is still competitive on the whole while leverage limits have decreased since the Brexit vote. There is plenty of liquidity across the whole market and this is not expected to change during 2017. Alternative lenders for example from Germany are becoming more actively competitive for prime assets at “normal” LTV rates, particularly where development debt is concerned. Speculative commercial projects are seen as now harder to fund and this is a trend that is likely to continue with only those with a very strong investment proposal being considered after detailed examination.
Meanwhile, another well established real estate company, Cushman & Wakefield, reported that the Brexit vote had a marked impact in delaying the progress of property deals particularly on larger lots (£100m+). Transactions were taking up to twice as long, however, the majority of the deals monitored from June 2016 are now complete. Their report noted that values had held up remarkably well considering the expectations of significant falls in value. Cushman & Wakefield expect the UK to underperform the rest of Europe over 2017.