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real estate finance - Autumn round up

3 October 2011

A challenging year to date, but confidence is returning

As we head towards the final quarter of 2011, it is safe to say that the real estate finance sector remains difficult for developers, investors and banks alike, although an increase in market activity and transaction volumes over recent months would suggest a rise in sector confidence. However, in practical terms, the shortage of prime stock (especially outside of the capital), combined with higher finance costs, conservative availability of finance and ongoing, comprehensive bank requirements, suggests that 2012 will continue to provide its own unique set of challenges.

Market activity over the past twelve months indicates that equity participation, mezzanine finance and joint venture arrangements may assist our sector on its road to recovery, with London also benefitting from a boost in investment from sovereign funds, wealthy foreign investors and specialist foreign lenders. Sadly, this interest is confined almost solely to the capital, hence it is fair to say that recovery in the regions may well be a slower process.

The message for this quarter is therefore clear: confidence is returning to our sector, but borrowers must negotiate a different financial landscape in order to secure funding in todays market.

Recent developments

In this quarterly round up, we look at the continued interest of insurance companies in pan European real estate and also welcome back the long awaited return of CMBS. We also briefly examine the challenges ahead.

Insurance and real estate - another way forward?

In the US, insurance companies are big investors in real estate, both via funds and equities. In recent months, insurers closer to home have been wrestling with harsh economic conditions and have found themselves coming under increasing pressure to improve investor returns. With the vast majority of investments tied up in bonds, growth remains stagnant, whereby eroding those returns. European insurance companies are therefore now turning to property lending and the relatively stable yields on offer.

The new EU solvency regulations have, however, dampened the collective spirit of the insurance sector as they introduce percentage charges which may influence the allocations which those insurers give to real estate assets. Broadly speaking, Solvency II is a review of the capital adequacy and risk management regime for the European insurance industry and is likely to introduced in early 2013. It introduces new approaches to valuing assets and liabilities, including real estate. Whilst the new regime should reduce the possibility of consumer loss and market disruption in the insurance sector, it has been criticised for its one-size-fits-all approach. Many insurers are unhappy about the percentage of regulatory capital which has to be set aside to cover a decrease in market value of investments and the property funds industry is currently lobbying to change it. Assuming that these initial hurdles can be overcome, early indications suggest that there is certainly plenty of interest here, with major names such as L&G, AXA and M&G already in the frame.

The return of CMBS?

The CMBS (commercial mortgage-backed security) market ground to a halt in the grip of the financial crisis in 2007, so it was a welcome relief to the market to see its return last month. Issued by Deutsche Bank, the £300m Chiswick Park deal was secured on Chiswick Park business park and is Europes first publicly marketed CMBS transaction in four years. Although the CMBS market only accounts for a small percentage of the commercial real estate debt to be refinanced, it is encouraging to see its long overdue return. Deutsche Bank has since confirmed its intention to bring two more CMBS deals to the market. There are also plans to increase this number significantly over the next year. A word of caution, however: investor nervousness over ratings failure in the US has recently seen the cancellation of two US CMBS deals and, with growing concern over the stability of the Eurozone in recent months, it will be interesting to see how the European CMBS market fares second time around.

Our real estate finance team would be delighted to assist you with any of your funding requirements. We are widely panelled with the regions leading lenders and are at the forefront of market developments.

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