Property remains a blind spot as the EU finally tries to redress the balance between protecting investors and supporting the economy.
Several years of regulatory overdrive coupled with very easy monetary policy have had dramatic impacts on the investment and financial landscape. Some effects have been accidental but positive, like the space created for non-bank lenders by the UK’s imposition of ‘slotting’ on its banks. Other interventions, like the capital framework for insurers under Solvency II, have been quite deliberate but poorly designed, with the potential to distort capital flows and create new systemic risks.
Meanwhile, the EU (and especially the euro area) economy remains in the doldrums – and policymakers have finally realised that the financial system has a key role to play in dragging it back to growth. The European Commission’s February Green Paper on a Capital Markets Union should therefore be a welcome development. While there are indeed good things in it, the paper is long on politically driven assertions – and very short on any awareness of the role of commercial property in the economy.
In essence, the commission wants to reduce reliance on bank finance and improve business access to both equity and debt, through more effective and efficient markets, served by more diverse sources of capital. That sounds jolly sensible, and echoes one of the recommendations in A Vision for Real Estate Finance in the UK, which calls for structural diversity in the sources and behaviours of debt coming to the UK property market. It remains to be seen whether the narrative about virtuous “market-based finance” triumphs over the nasty “shadow banking” narrative in describing what is, in substance, the same thing.
Another central goal is to achieve better cross-border integration in equity and debt capital markets across the whole EU. That makes sense too: as most fund managers know, the EU isn’t really a single market for investment capital (and the commission has not done all it could to facilitate consistent implementation across EU countries of the AIFM Directive, for example). Lowering barriers for new lenders and for those seeking capital, boosting long-term investment and rehabilitating sustainable securitisation are all laudable aims.
The focus throughout is on infrastructure and, above all, SMEs. You might think that would put commercial property centre stage, given how much local and urban infrastructure is (or is funded by) commercial property, and how many property-related businesses are themselves SMEs. Indeed, the supply of premises to rent is itself a quasi-financial service, allowing smaller businesses in particular to rent space flexibly, outsourcing property market risk and the capital-intensive work of building and maintaining buildings to the property industry.
However, it seems no-one told the commission about the existence of a real estate investment asset class beyond private home ownership and buy-to-let investing. One of the few mentions real estate gets in the CMU materials is a complaint about how almost all the household wealth that isn’t sitting unproductively in bank deposits is tied up in the form of home equity. The commission wants to see more savings channelled into financial instruments, but commercial property is not recognised as part of the answer.
Sadly, this blind spot is nothing new. The architects of the AIFM Directive, EMIR, the proposals for European long-term investment funds, and proposed criteria for identifying ‘good’ securitisation have all been unwilling to understand how their creations would affect commercial property. The Bank of England seems similarly afflicted, judging by a financial stability paper it published in February on CMU, although its analysis is far more thoughtful, balanced and evidence-based than that of the commission.
It remains to be seen how the commission will balance its breathless enthusiasm for fast-tracking more European household savings towards innovative, high-return start-ups, with the need to ensure investors understand the risks they are taking. But we underestimate the importance of the CMU initiative at our peril: commission president Jean-Claude Juncker is looking for an action plan later in 2015 with a view to having in place a “well-regulated and integrated CMU, encompassing all member states, by 2019”.
In the meantime, we will continue to work with the BPF, INREV and other national and international real estate industry organisations to improve European policymakers’ awareness and understanding of our sector.
Peter Cosmetatos is chief executive, Commercial Real Estate Finance Council Europe
