Europe on edge of property financing evolution: Henderson

Europe's real estate financing system has begun the slow evolution towards a more diverse model now that the Continent's banks are no longer in a position to lend at traditional levels, according to John Feeney, head of commercial real estate debt at Henderson Global Investors.

Real estate loan pricing is highly unpredictable in the ongoing financial crisis and lenders are coming in and out of market from month to month, leaving the EUR 2.5 tln European property lending market in a very poor place, Feeney told a Henderson event in Amsterdam recently. 'Europe's bank-dominated real estate lending market has stopped functioning effectively, and in some areas is totally dysfunctional,' Feeney said.

But there are signs of change, he noted. 'I think we are at the beginning of an evolution away from a model that looks very much like Asia with the banks entirely dominant towards something a little bit more like the US, which has diverse funding sources for real estate. It took a number of crises in the US for that model to be formed so I think that is what may happen here in Europe as well.'

Traditionally, banks have been the 'only game in town' in relation to real estate lending. The banks not only provided on-balance sheet loans, they were also behind German covered bonds, or Pfandbriefe, and commercial mortgage-backed securities (CMBS) funding.

European banks can no longer sustain this level of funding as a result of the combination of losses incurred by the financial crisis and new regulations which act as a brake on new lending. Feeney noted, however ,that this has enticed insurers and new debt funds to enter property financing to access increasingly attractive returns.

However, these new players are only interested in the best properties and sponsors. The focus is on the UK and German markets, with very little appetite for setting up business on the peripheries. 'The lower quality stuff is going to have a few very torrid years,' Feeney said.

Henderson has two new debt vehicles. The first is the High Income Real Estate Debt Fund which has a target launch size of £250 mln (EUR 312 mln) and targets gross returns of between 8% and 10% for a modest risk profile. The Senior Secured Real Estate Debt Fund has a target launch size of £500 mln and gross returns of between 5% and 6%.

Feeney said the transition to a new funding model will take time in Europe as new lenders have to build the appropriate infrastructure and the knowledge among the investor base. 'It will be a fairly bumpy ride as we get there and vast amounts of capital are needed so the emergence of this new model will take a bit of time.'