One very important lesson to emerge from the recent financial crises has been the need to reduce the over-reliance of the European property sector on bank lending as a primary mechanism for capital-raising.
One very important lesson to emerge from the recent financial crises has been the need to reduce the over-reliance of the European property sector on bank lending as a primary mechanism for capital-raising.
This situation has created significant problems for the banking sector in a number of European countries. In Ireland, for example, it has led to the full nationalisation of one bank and the creation of a special-purpose agency to deal with problems of distressed real estate assets, Éamonn D'Arcy writes in the September edition of Property EU Magazine.
Similar problems have arisen in the banking sectors in Germany, Spain and the UK. The current negative perception of real estate lending has likewise created major difficulties for the real estate sector in its attempts to raise capital. This is likely to constrain the sector's growth in the medium term with negative implications for employment and the viability of some players.
Even where capital-raising has had a more diversified funding base, such as in the case of non-listed real estate vehicles, the crises exposed significant stability problems in many such entities due to a fundamental difference in the objectives of institutional and retail investors, combined with obvious issues related to fixed redemption dates falling within likely periods of depressed capital values.
In this context, the need to explore and strengthen alternative and stable mechanisms for capital-raising has become a key imperative. An obvious route is that of encouraging the growth and development of Europe's publically listed real estate sector. Its post-crisis performance, especially in terms of capital raising, illustrates the viability of such a strategy.
Over the past decade this sector has experienced significant growth and change, most notably in terms of the introduction of REIT regimes in a number of large European markets such as France, Germany and the UK. Within this process, the European Public Real Estate Association (EPRA) has played a role not just as a voice for the listed sector but more importantly as an organisation which has directly contributed to improving the sector's transparency.
The rest of the column appears in the September edition of PropertyEU Magazine. Click on the link below to subscribe.
Éamonn D'Arcy is the Programmes Director of the MSc Real Estate Programmes in the Henley Business School at the University of Reading
