GRI Europe Summit 2013 - Interviews - Global Real Estate Institute

Interviews

In anticipation of the GRI Europe Summit 2013, we have asked some of the participating industry leaders for their comments on the European market’s challenges and solutions.

“The more turmoil in the world, the more people will appreciate the stability and the continuity of Europe”
Samih Sawiris
CHAIRMAN & CEO
Orascom Development Holding
SWITZERLAND

“… as always, property is a local business, therefore picking specific sectors in specific locations will continue to differentiate the good investor from the average investor.”
Fergal Feeney
HEAD OF ASSET RECOVERY
IBRC
UK

http://www.globalrealestate.org/Europe2013/Interviews

Aside from the economy’s slow recovery, what other macro trends are impacting the Real Estate market?

Samih: The unhealthy banking sector, which is far from recovery. When you see that banks like Santander, which is one of the leading banks today, are still taking new provisions for Real Estate portfolios five years into the crisis, this gives you an indication that the clean-up has not been completed and it is to be assumed that the appetite for Real Estate in the banks is still not there. This is a major impediment for full scale Real Estate recovery.

Fergal: A number of macro trends are influencing the Real Estate sector, both positively and negatively. On the positive side - Firstly, the increasing availability of debt funding and improvement in the debt finance market with more lenders willing to consider Real Estate loans outside of core Real Estate, into the core plus sector. Secondly, the availability of equity/high level of equity raised (particularly from the US private equity funds) is also increasing liquidity in the sector. Thirdly, you’ve got more financial institutions/government-influenced institutions which are beginning to release more assets to the marker and divest their portfolios. And fourthly, the continuing low interest rate environment keeping the cost of debt relatively cheap. On the negative side, the macro trend is really on the regulation piece, because Real Estate lenders - under new regulatory/capital adequacy provisions - are having to re-look after existing loan portfolios and hold more capital against those loans portfolios on their balance sheet.

Given the volumes of maturing Real Estate debt upon us, where do you feel most of the refinancing will come from?

Samih: As cynical as it may sound, I believe the same banks that gave all these loans will be the ones to re-finance them.

Fergal: Most of the re-financing will come from the non-bank sector. So the insurance sector/insurance funds are beginning to lend more and more in the UK and in Europe and moving a little up the risk curve and into non-traditional sectors such as Student Accommodation. You also have newly established Debt Funds set up by private equity groups, like for example Starwood Capital and Longbow - both examples of alternative finance for Real Estate investors - which are becoming increasingly more prevalent as lenders in the real estate market. And thirdly, the SWFs which are willing to lend and put out senior debt, an example of that being the CIC.

Which of Europe’s geographical markets look the most financially attractive to you?

Samih: Emerging Europe, places like Montenegro, now a more structured mature state with huge potential especially with their extreme generous tax system that is attracting more and more European companies to consider it as an option; Germany and in particular the new cities that still have Real Estate prices below replacement cost; and finally Spain which has now hit bottom and can therefore only go up!! All interesting options!

Fergal: There are some micro markets that are showing definitive signs of recovery, for example Ireland, in particular Dublin and in particular the office and resi markets in Dublin. I think Germany still remains attractive because of the underlying fundamentals of the economy. Therefore large German cities such as Munich, Frankfurt, Dusseldorf, Hamburg, Berlin and their surrounding areas look interesting from an investment perspective. There may be some opportunities for residential (housing) development in good UK regional areas and commercial real estate opportunities in good regional cities in the UK. Shrewd European investors are finding traction in ‘wholesale to retail’ opportunities. They are buying loans or properties out of larger portfolios bought by private equity funds.

Which Real Estate sector could surprise us in the coming year?

Samih: Being totally outside of the retail, office & logistics sectors, I shall choose not to give an unfounded answer.

Fergal: I think logistics will continue to perform because it’s the most recession-proof, most robust and least volatile sector. In addition, it is the least over rented sector and benefits from reasonably good occupier demand. I also think residential will continue to improve as a sector, particularly in dominant attractive international cities such as London, Munich, Berlin, Paris and Dublin.

Universal Europe’ – Are investors from across the globe upping their game on Europe? And what impact will this have on the industry / for you?

Samih: Yes and rightly so – I believe that the more turmoil in the world, the more people will appreciate the stability and the continuity of Europe and therefore it will be a more attractive place, simply because it stands out as safer bet during the instability of the world. At the end of the day, one must look at matters in a relative context and not in absolute terms.

Fergal: Yes. Predominantly investors from the US and the Middle/Far East. These investors are focussing specifically on Europe because of what they perceive to be an opportunity resulting from the deleveraging of banks in Europe. This deleveraging should see more sales of loan portfolios and/or real estate assets from banks’ balance sheets and sales of assets from institutional funds who are reducing their exposure to real estate. For me, this will have a positive impact on the industry as it will continue to create competitive tension on pricing, which will on an overall basis, improve pricing on European Real Estate.

European Real Estate 2014 - Is the optimism justified?

Samih: I think the optimism is justified, because sooner or later all the printing that has now stopped will result in an inflation that will drive people back to Real Estate. So this is not an exaggerated optimism.

Fergal: Yes. Optimism has returned to Europe’s real estate market. Sentiment among market participants about the prospects for their business is more positive today than it has been for a number of years. A significant level of Equity has been raised for investment in commercial real estate and the debt funding markets are beginning to improve, albeit at a conservative level. But there is still some uncertainty about the macroeconomic outlook so market participants will need to remain cautious. And as always, property is a local business, therefore picking specific sectors in specific locations will continue to differentiate the good investor from the average investor.

http://www.globalrealestate.org/Europe2013/Interviews