Utrecht, June 2021
TrendWatch explains the most important trends that Beaufort identifies within its various fields. This edition discusses shifting financing opportunities for commercial real estate.
For those who know their way around the financing landscape, there are still plenty of options.
ECB’s increased monitoring & regulations
Never waste a good crisis‘, is what the regulators must have thought. The corona period has been accompanied by a significant tightening of credit risk and standards monitoring processes, according to the ECB’s recent “Euro area bank lending survey” and KPMG’s recent article titled “With asset quality on the brink, supervisors’ focus on credit risk is growing”. In the coming period, the supervisor will increasingly focus on the capacity of banks to identify a decline in the quality and value of the collateral and how the associated credit risks is monitored, also taking into account the termination of the governmental support measures. In addition, focus will be on the robustness of internal controls, potential backlogs, provisioning modeling and the management of non-performing loans.
It seems to be a logical reaction of an institution that expects an increase of forbearance and non-performing loans in the coming years. With the increased focus on credit risk the supervisor responds to these trends. Insiders might not see this as an abrupt switch to stricter controls and will place it in a broader framework of new rules and guidelines that have been introduced in recent years. Banks are introducing more and more conditions with regard to sustainability, energy, social impact and governance (reflected in the ESG objectives) and are faced with strict compliance requirements. The number of conditions banks must meet will most likely continue to increase in the coming years.
Parallel to, or perhaps because of, the increased focus on the quality of the underlying assets, the internal policy of banks on the financing of commercial real estate is also becoming stricter. In addition, the future occupancy and subsequently the market value of properties is still uncertain for many financiers. Where residential- and logistic real estate are popular asset classes, banks are often reluctant to finance other real estate classes. What remains is a strong focus on a limited amount of product.
However, there are sufficient opportunities to obtain commercial real estate financing. PWC identifies a high availability of capital in its recent trend report for the European market. The current lack of interest in non-core products at the traditional banks has created room for alternative lenders. There is a noticeable switch to local non-bank lenders as well as foreign debt funds active in the Dutch market. In short, financing is available for those who know the way to these parties.
As in all transactions an outline of the real estate, the occupiers, the ownership structure and the business case are of importance. It is now more important than ever to look ahead with the help of a well-founded business plan, in which the sensitivity of the case must be mapped by means of liquidity- and scenario analyses.
In essence, this means that the emphasis should be on the upside of the underlying real estate rather than regarding it as a static affair. Examples include recent innovative retail and office concepts or transformations, as well as sectors that have been hit hard in recent times and are expected to return to the market. Customisation in the structuring of the financing is desirable, and possibly essential to arrive at the right loan.
Beaufort is an expert in complex business cases and distinctive financing structures. We work through an in-depth process, in which the financing needs are explicitly mapped and translated into an RfP written in the language of the lenders. We share the proposition within our extensive network with domestic- and foreign lenders in order to achieve optimal financing. Crisis or not, with the right approach, it’s never a bad moment to seize an opportunity.