INVESTMENT BRIEFING: Europe’s real estate financing market 'at a crossroads'

Although Europe has made significant progress towards a more diverse funding market, it is now facing serious headwinds as a result of the postponed implementation of liquidity requirements for banks, according to leading industry executives.

Speaking at PropertyEU’s Debt Investment Briefing during the MIPIM trade fair in Cannes, UBS’ head of European real estate debt Anthony Shayle said the deferment of Basel III rules for the banking industry may cripple growth for alternative lenders and ultimately drive the old continent back to a funding environment dominated by the banks.

‘The delay in the introduction of liquidity rules was not a good solution. I am worried that banks could come back in full force and debt funds could be crushed out. We stand at a crossroads, where the choice is between going back to the lack of diversity of funding, which created the problem in the first place, or continuing on a path towards a diverse funding market,’ said Shayle.

Raphael Brault of AEW Europe agreed that banks are back at full strength. ‘Three years ago all traditional banks were moving to distribution models. But we see that they are rebuilding their books now,’ he added.

Institutional investors attracted to debt funds because of the higher returns offered may be less inclined to invest in the sector if margins plunge as a result of higher competition, he added. ‘We have been approached by a number of institutions who want to invest in real estate debt. This trend will continue as long as there continues to be an advantage in terms of margins. But if pressure on margins continues institutions might stop being interested in debt funds,’ he noted.

Another threat to debt funds is posed by the likely return of an active CMBS market, say experts. Institutions may prefer to put equity in a liquid bond-type of investment instead of having it locked in more illiquid real estate debt.

‘Institutions are chasing returns, they move from one asset to another,’ Shayle commented. 'I am worried that if CMBS return they will represent a threat to the debt fund industry.'