There’s optimism about the recovery and the state of the market but uncertainty over which sector will perform well, experts agreed at Real Asset Media’s European Debt Finance & Investment Briefing, which was held online this week.
“We’re unlikely to have a broad-based economic shock because there is so much liquidity in the system and there has been a lot of Government help,” said Ali Imraan, director of debt and special situations, LaSalle Investment Management. “The real question is in which sectors are the fundamentals shifting under your feet?”
The most obvious answer is retail, with some lenders having a blanket policy of no new offering at all, with the exception of food retail. But there are also questions being asked about offices because of the shift to home working.
“There is strong demand for beds, sheds and meds, but offices are polarizing lenders,” said Deepak Drubhra, co-founder, Westfort Advisors. “There are many different opinions about when and how people will return to the office, and that’s filtering down to the debt market as well.”
Covid has been a massive accelerator of existing trends, but some basics like quality and location continue to make a difference.
Negative impact will hit B & C cities disproportionately
“A well-located office will always offer very compelling risk-adjusted returns,” said Imraan. “If you own an office in Munich city centre you’ll be fine for the next five years, but if you’re on the outskirts of a B or C city then the negative impact is likely to hit you disproportionately.”
The pandemic is providing big dislocation opportunities in the market. One example is hospitality, where there is likely to be a shift towards more local tourism and intra-European travel.
“We are big believers in the hotel sector,” said Drubhra. “There are opportunities there, especially on the leisure side, as people travel again.”
In general, sectors that offer a degree of cashflow certainty have seen significant interest from the lending community. A more adventurous approach presents risks but offers more rewards in a less crowded context.
“It’s a stockpicker’s market,” said Imraan. “If you understand your real estate you can find opportunities across real estate sectors but also across capital sectors, from mezzanine to home loans to construction financing to JV equity.”
The environment is benign, but there’s still a focus on income, cashflow, covenant strength, quality and good track records.
“We are careful on the transaction risk profile, because you should never catch a falling knife,” said Matthias Sandfort, group head of finance, Corestate Capital Advisors. “When it comes to our debt investment strategy, we focus on three factors: transparency, liquidity and availability of equity.”
Massive Government support and the amount of liquidity in the market have limited the short-term damage, but there are concerns about the medium to long-term impact of the crisis. There is a sense that the full picture has not emerged yet.
“The consequences of loan performance take a while to show up through the system and we can see that across property types,” said James Mathias, portfolio manager, real estate debt, PGIM Real Estate. “Eventually there will be portfolios that underperform and they’ll be opportunities to look at closely.”