When you have been in the real estate finance industry for nearly 30 years, you not only see the cyclical nature of the real estate market, you experience at first hand how volatile it can be.
The news that the Bank of England has cut interest rates to 0.25% – a record low and the first cut since 2009 – came in the same week as a report from Markit that confidence about the year ahead is at its lowest since February 2009. The UK economy is contracting at its fastest rate since the financial crisis. Activity in the UK’s dominant services sector has seen its sharpest fall in seven years.
So could we see a repeat of 2009? Could the Bank of England’s pre-Brexit recession warnings come to fruition? And what does this mean for commercial real estate and, in particular, the debt markets?
Although it may feel like déjà vu, we have not been here before. We remain in a period of uncertainty and this has been reflected in the market.
Immediately post-referendum we saw the market yo-yo and heard conflicting reports of deals being done versus deals being pulled. Sterling took a battering and investor confidence plummeted, as demonstrated by the domino effect of the temporary freezing of seven of the biggest property funds, reminiscent of 2009. But the market has subsequently settled down somewhat.
The Bank of England has also changed its tune and post-Brexit-vote it no longer foresees a recession in the UK, according to its latest quarterly inflation report, because of the action it is taking to avoid such an outcome.
The Bank of England’s quarterly inflation report in May, which warned that a vote to leave the EU could lead to a recession, excluded any possible stimulus measures; while its post-Brexit-vote forecast takes into account these stimulus measures – the rate cut and increases to quantitative easing, purchases of corporate bonds and very low interest loans to banks.
In August, I joined CR from Citi to set up new capital advisory services for CR – CR Capital Advisors – looking at debt and equity placement and advisory. In my discussions with contacts in the market, the consensus is the same – the market is quiet at the moment. That is likely compounded by the summer months, when news about the Rio Olympics has taken over the front pages from Brexit.
The real test comes in now that summer has come to a close and Brexit discussions recommence; any deeper or more lasting effects will start to become more apparent.
In my new role I will be providing loan brokerage, real estate finance advisory and loan syndication services across key European markets, including the UK, Germany, Holland, Spain and Portugal where the banking system is “broken” or at least partially dysfunctional in financing the broad spectrum of commercial real estate assets. I will facilitate sponsors in refinancing and recapitalising existing transactions as well as in sourcing debt and equity capital for new transactions.
In terms of refinancing, the Netherlands continues to present a source of opportunities coming out of non-performing loan portfolios, which will need different financing, potentially from alternative lenders. UK and Irish NPLs are slowing down, but the assets have now been transferred to private equity firms and plenty of those are going to need refinancing.
Banks and alternative lenders have substantial capital to deploy and this has not changed. There is a big wall of equity out there and, as highlighted by Capital Economics in recent reports, property remains very attractive compared with bond yields. Additionally, weak sterling provides an attractive investment opportunity and outsized relative returns for overseas investors and we are beginning to see Asian money coming back into the UK.
But let’s not forget that the market was somewhat stifled before the referendum vote. German banks, among others, started to syndicate debt and reduce some of the risk from their balance sheets. Now there is a lot of reallocation of money. This is a significant divergence from the liquidity challenges of 2009.
Stuart Hoare, managing director, CR Capital Advisors
