As banks have retreated back into their shells to nurse their debt and distressed assets so traditional sources of development and investment finance have all but dried up. The future terrain of real estate debt and equity is set to look very different and will be determined by a new group of ‘movers and shakers’, drawn by ‘offices’ more stable ground but also by fertile opportunities.
For the foreseeable future (likely to be 2017 at the earliest), finance for speculative development is set to be extremely limited, thereby starving core European cities of high-quality stock and exacerbating the value polarisation between grades of stock. And overall supply will not be helped by new equity players and sources of debt finance, particularly US institutions, continuing to target the same prime office buildings – and lower-risk lending – in the most liquid markets such as London and Paris. More entrepreneurial money (such as debt funds) will need to look higher up the risk curve and further afield across Europe for more open opportunities and stronger returns – it still stands that if you can enable development in the best locations you will outperform. Meanwhile, equity-rich investors who can take a long-term view will spot growing opportunities in secondary stock as the spiral of depreciation accelerates.
Whatever and wherever the opportunity, timing will be critical – especially when assessing the cost of finance. Over the near term it will continue to be low but margins will remain high. However, stoked by quantitative easing and eventual economic recovery, interest rates will inevitably climb, probably from 2014/2015 – those who currently benefit from strong relationships and lower overall lending costs should consider locking in now. And if you can pick the moment (as well as the right product and location), opportunities to flourish and ‘steal a lead’ lie ahead.
[For a more in-depth view on the changing face of finance, see what we are saying in our Offices 2020 programme which is looking at the future of offices across EMEA – better still, join in and share your thoughts with other lenders, investors and developers].