Debt markets have the unenviable task of pricing in the impact of several significant macro variables for which a wide range of permutations still exist. Political risk, such as Brexit and US-China trade war tensions, and the impact of rising interest rates across Europe, UK and the US, all still weigh on sentiment.
In addition, concerns of late-stage cycle in real estate, the prospect of moderating GDP growth real estate performance and historically low investment yields across many markets all feed into lenders’ appetite for new lending.
The consequence is likely reduced liquidity for high LTV loans from non-bank sector. Stricter regulations have long restrained banks from operating in the space, leaving the market open to private debt providers. However, the pace of capital raising in this market is showing signs of slowdown. Prequin reported declines in capital raised for direct lending and distressed lending in 2018. Banks are expected to maintain disciplined lending with moderating LTVs in more conservative senior deals, as lenders across the board seek to re-evaluate the outlook for rental growth across sectors where the ‘winners’ and ‘losers’ are diverging sharply.
While debt remains a defensive means to secure exposure to real estate, there was a notable uptick in capital deployed towards alternative sectors, such as residential markets (student accommodation, PRS and retirement living), where long-term demographics suggest a degree of resilience in a slower or retracting market. According to PwC’s Emerging Trendsin Real Estate 2019, banks have been reluctant to fund speculative projects, insisting on pre-lets. Alternative lenders may be more open-handed, liquidity remains modest.
CMBS issuance rebounded in 2018 with around €3.4bn in new issuance, compared to just one deal the prior year. Morgan Stanley managed to price the £349.1m Salus ELoC 33, backed by Brookfield’s CityPoint Tower in the City of London, ahead Securitisation Regulation came into effect at the turn of the new year which imposes greater transparency and reporting requirements on new transactions pre-pricing, and post closure.
This could lead to a slower start to the New Year in new issuance as compliance with new regulations may impact deal execution timing and costs. Nevertheless, Morgan Stanley has forecast at €5bn for 2019 in European CMBS new issuance, a previous ‘new normal’ benchmark in the last mini-revival for the sector five years ago.