Uncertain times are here again, after several years during which everyone seemed to agree about what was going on in the market.
From the perspective of debt-providers, this is especially uncomfortable, because the “success” of winning a deal simply means money goes out the door. The best that can happen is a few years later you get it back with (these days, not much) interest.
Debt is essential for the commercial property industry, as it is for the economy. It facilitates the efficient deployment of capital, and productive investment. But the beguiling simplicity of secured lending hides risks. How well do lenders understand, and respond to, the markets they serve?
History is not encouraging. A recent FT Alphaville blog quoted Citibank’s chief executive in 2006 explaining bank behaviour in those heady days: “As long as the music is playing, you’ve got to get up and dance. We’re still dancing.” He wasn’t talking about commercial property lending, but the uncomfortable, hollow humour of his point is all too familiar.
Since 2006, we have entered a world of seemingly eternal low interest rates, and bank business models face existential challenges, including from fintech. In addition, post-crisis regulatory reform has ramped up capital requirements and compliance burdens for banks. Changes to accounting standards requiring earlier anticipation of likely losses should also have an impact over time. But have incentive structures, focused on short-term metrics, been transformed? It is hard to judge whether today’s more cautious and responsible property bankers are more than a cyclical phenomenon.
Banking is an industry prone to waves of firing and hiring in response to short-term market signals. It is also facing a structural shortage of younger professionals with a reasonable degree of experience, because of the lean years that followed the crisis. Many recent recruits to property lending teams have little or no property expertise, and few experienced old hands are still around who can pass on their wisdom.
The adage has it that the commercial property industry has a 20-year cycle, but a memory only half that length. The equity side of the industry has worked hard to address that problem in recent decades, becoming much more professionalised thanks to (among other things) better market information and considerable investment in research and education within the industry as well as from academia. A similar drive is needed for the lending side, to benefit financial stability, lending firms and individual professionals.
Work is quietly gathering pace on implementing the third recommendation of the Real Estate Finance Group’s Vision report, which called for the development of industry-wide qualifications and training to ensure both lenders at the coal face and those with portfolio-level and risk management responsibilities at lending institutions have the knowledge required to do their jobs. It is great that both banks such as Royal Bank of Scotland and industry bodies such as the Investment Property Forum are closely involved in that effort.
In the meantime, CREFC Europe has been placing more emphasis on education and training, amid strong demand from lending professionals and their advisers. Our educational half-day ahead of each of our two annual conferences regularly attracts more than 150 attendees, and our one-week executive education course, launched last summer, will get its third outing this July, with a two-day version debuting in June in Germany (organised jointly with the Association of German Pfandbrief Banks).
There is appetite for training from those running lending teams, who see it as a reward for their up-and-coming stars, as well as a good complement to on- and off-the-job training at their own firms. And there is enthusiasm from the junior ranks. In the future, we are keen to empower our new youth network – Young Professionals in Real Estate Finance – to help us plan the learning and career development offering they would find most useful.
Training for property lenders is not the most contentious of the Vision report’s recommendations – it will not excite controversy in the way the loan database proposal has, for example. But it is no less important for the future of our industry, and the individuals who devote their working lives to it.
Peter Cosmetatos is chief executive of the Commercial Real Estate Finance Council Europe
