Much of Europe has been affected by the recent recession. The European economy and the banks that support the EU are interlinked. When one suffers, they all suffer. As major banks have been watching the darkening skies harrowing possible financial fallout, they instinctively reign in the potential for losses, which has recently created havoc for corporate and private investors.
This is not to say that the financial outlook is all doom and gloom. Economic projections throughout the Eurozone are predicting slow but steady gains. The Emerging Trends in Real Estate Europe 2013 completed by the Urban Land Institute and PricewaterhouseCoopers stated that “Optimism has returned to Europe’s real estate industry. Sentiment among industry leaders about the prospects for their businesses is more positive than at any time since 2008, despite the uncertain macroeconomic outlook.
How will this affect the European real estate capital market in 2013?
The analysis of both the equity and debt market reveals that 2013 is not going to create a sudden explosion in the real estate sector, but rather a conservative investing approach as banks remain on the lookout for safer investments and higher yields. “The new sources of equity and debt that are emerging will be insufficient to fill the refinancing gap and, in any event, will be focused on prime or low-risk assets. Debt is expected to be available primarily to those who don’t need it ” op. cit. Emerging Trends report.
Availability of Financing in 2013
If 2012 is any indicator, do not expect financing to become any easier. Businesses found it harder to obtain financing in 2012 than in previous years. Banks are looking to reduce their risk and are seeking safer investments by making it even harder to meet lending requirements.
As we step into 2013, the clamp on debt financing seems to be tightening. Of those surveyed in the Emerging Trends report, “56 percent predict less debt for refinancing and new investment. Only 20 percent think more will be available.” Unfortunately, this trend does not appear to be changing any time in the near future with projections pushing this out at least five years. This is not to say that the crunch is felt equally by all in Europe. Greece, Portugal and Benelux have been the hardest hit with Turkey, Italy and Spain coming in as a close second. It appears as though Germany, Central and Eastern Europe and the Nordic countries will keep about the same lending policies as last year or even present a slightly improved borrowing environment.
Availability of Equity for Refinancing in 2013
Though the debt market has shrunk, the equity side is showing improvement. Many real estate markets are appreciating again, rents are on the rise and the investor’s outlook toward real estate is improving. This is building momentum and increasing equity. Investors, however, remain focused primarily on safety over returns. Nevertheless, 42 percent of respondents to the survey expect a moderately greater availability of equity for refinancing or new investment. This has been spread equally among all almost all real estate sectors from REITs to residential land developers.
How will this affect local small to medium sized investors?
As we see many real estate markets rebound, especially those found in cities such as Berlin, Munich and Dublin, leverage is going to be a hard commodity to obtain. With many lenders looking at 40 – 60% loan-to-value ratios, one must have sufficient available capital to even enter the real estate market. Those that have investment portfolios stand to profit from the 2013 economy as equity increases. The challenge, however, can be in the ability to free up the equity and use is for other capital investments. There is however an interesting development on the horizon. The United States and Asia are becoming hungry to access the strengthening European market. This trend could very well imbue added capital into the European Union strengthening local investors and adding security to the bank’s portfolio.