The European referendum and the degree to which it is affecting deal volume has been the dominant topic in UK property. But it makes it easy to overlook other challenges visible in the rearview mirror.
One of these is that we are approaching a new point in the post-crisis cycle at which the loans originated in 2011-13 will need to be refinanced.
Those were the years when the real estate recovery began to take hold and investment transactions started to rise again. Many buyers who invested at that time have seen the value of their assets go up, and today they are taking stock.
Having completed the business strategies for these properties, should they sell now, or should they refinance?
The 2011-13 period was also pivotal for debt liquidity, which started to trickle back into the market, helping banks to shift non-core loans and borrowers to refinance. Many of those loans will also need replacing in the coming 24 months.
So 2016, and even more so 2017, will be years of refinancing. CBRE estimates that some €157bn (£120bn) of debt was issued for acquisitions alone in Europe during the three years from 2011, a figure that will be higher still if existing loans which were extended with relationship banks or refinanced with new lenders are included.
The UK debt market is essentially healthy and should have the capacity to absorb and safely refinance the next wave of loans
It would be a mistake to underestimate this capital requirement, or to assume that the traditional banking sector is back and ready to refinance it all. In parts of the eurozone, some banks still remain burdened by legacy debts, while in the UK they have other issues to consider.
However, this is a refinancing task that is achievable for three reasons. Firstly, commercial real estate debt is still historically cheap because of low interest rates and competition from lenders to put out money, and that adds up to sufficient options for borrowers.
Secondly, the UK property lending market is no longer dominated by banks because debt secured on real estate remains fundamentally attractive to global institutional capital. Real estate senior debt continues to offer a tempting premium over bonds and comparable asset classes, which is helpful liquidity in a volatile and potentially deflationary world.
There is an array of non-bank lenders keen to lend to the sector and committing growing amounts and types of capital, among them debt funds, international investors and insurance companies, with the latter increasingly able to provide shorter as well as longer dated loans. It is true that some of these new lenders are unregulated – banking regulators will of course have to be mindful of this, in case they have the wrong targets in their sights, to avoid overheating down the line, but right now we are a long way off from this.
This more responsible world is the third reason to have confidence that the outstanding debt will be refinanced. Although the use of leverage across transactions went up in 2014-15, it was still low compared with the boom years pre-crash, with equity accounting for roughly half the capital in recent investing structures.
The equity cushion in the 2011-13 leveraged transactions is even fatter. As referenced in the CBRE European real estate finance update, only 36% of €436bn of commercial real estate investment was funded by debt for those three years.
Taken together, these trends show that the UK debt market continues to change but is essentially healthy and should have the capacity to absorb and safely refinance the next wave of loans. For borrowers reassessing their investment strategies, debt can continue to be value accretive, provided they match the right debt partners and capital structures to their assets.
Richard Dakin is managing director of CBRE Capital Advisors
