MIPIM, the largest real estate conference in the world, was held last week in Cannes, France, for the first time since the outbreak of the covid-19 pandemic in March 2020.
But the event’s return was overshadowed by the war in Ukraine and dire humanitarian crisis, with market participants trying to square the impact of the conflict with a global real estate market that continues to transact. The specter of rising inflation and higher interest rates, the knock-on effect on transaction volume and the impact that rising material costs will have on development and redevelopment were another major topic of concern.
But one of the biggest themes was the divergence of the US commercial real estate debt markets from its counterparts in the UK and Europe.
Here are three key takeaways:
The US and European real estate markets, which had been moving more in step prior to the pandemic, appear to be trending in different directions. A greater proportion of UK and European lenders and investors were at the event, with many US market participants declining to make the trip due to lingering concerns about the impact of the covid-19 pandemic.
The clearest area of divergence was the place of green lending in an institutional debt portfolio. UK and European lenders, spurred in part by regulations from the EU as well as pressure from their institutional shareholders, are moving closer to creating standardized templates for green lending that will make these structures more pervasive in the market.
In addition to green lending and green bond issuances from public real estate companies, a handful of alternative lenders are starting to seek ratings in order to issue unsecured green bonds, market participants told Real Estate Capital USA.
The US CRE CLO market had a bumper year in 2021, with more than $45 billion of issuance, and is on track for an equally strong year in 2022. In comparison, the UK and European CRE CLO markets are anemic, with these securitizations rarely completed.
CRE CLOs perform a function that is more broad than simply allowing lenders to fund new loans.
“Alternative lenders in the US will use the CLO market as their funding mechanism, and that doesn’t exist in Europe,” one veteran lender told Real Estate Capital USA. “This activity becomes self regulatory in terms of what the securitization market will allow lenders to do through CLOs. It’s a very significant difference.”
Spreads on newly originated loans are widening in response to the situation in the Ukraine as well as through macro factors like inflation and higher rates. But that has not stopped borrowers and lenders from transacting.
“The market is not making a pause, although this is something that we need to monitor daily because things can change dramatically overnight,” said Duco Mook, head of treasury and debt financing EMEA at CBRE Investment Management.
Part of this activity stems from the fact that most institutional lenders and borrowers do not have exposure to Russia, Mook noted. The other part is more conservative underwriting from lenders.
“What’s happening doesn’t mean there will be liquidity risk for borrowers. But you might see more conservative LTVs or lenders accepting less vacant space,” Mook said.
The situation is, in some ways, day-to-day, with market participants telling Real Estate Capital USA that what happens next is in part dependent on what happens in the Ukraine conflict. There were a handful of attendees who raised the prospect of a broader conflict, before dismissing speculating on what might come next.
Investors and lenders are likely to be more conservative, even if there was to be ceasefire announced tomorrow.
Nick Axford, global head of research at Avison Young, suggested looking to history for some cues to what might come next.
“We are in some ways looking at an environment that is in some ways reminiscent of the shock in oil prices in the 1970s,” he said. “We are certainly getting some supply-side shock from the energy industry again. But the world is different in a number of ways, including how the central banks are reacting and signaling that they’re still committed to rate increases being discussed because of the inflationary threat.”
Axford also brought up a bright spot. “One of the features of today’s market is that we don’t seem to be seeing the same excesses coming out of the lending market that we did in the run-up to the financial crisis,” he said.