One of the biggest risks in the years ahead for the real estate industry is the rising cost of capital, attendees at the ULI Trends conference in London heard last week.

One of the biggest risks in the years ahead for the real estate industry is the rising cost of capital, attendees at the ULI Trends conference in London heard last week.

‘The cost of money is going to be higher over the long term,’ predicted John Feeney, global head of corporate real estate at Lloyds Bank.

The jury is still out on whether a credit bubble is in the making, but the signs are ominous, William Rucker, chief executive of Lazard London, said. He pointed out that interest rates had been cut 515 times in the past five years.

And in today’s hunt for yield, bonds in El Salvador and Rwanda compare favourably with returns for a solid UK REIT like Segro, he added. ‘We live in an incredibly distorted world.’

With quantitative easing tapering off in the US, Rucker said the challenge would be to wean off government-funded credit without ‘an almighty crash’. It will need to happen ‘very very slowly,’ he warned. ‘There’s reason to be cautious, the markets are very volatile.’

Massive changes are underway on the capital side and tensions are building up for a new disaster, agreed Gerald Parkes, CEO of Pacific Real Estate Capital. While alternative sources of lending are becoming available for real estate in Europe, the market remains undercapitalised, especially compared to the overcapitalised US market. ‘There’s still a vast amount of work to do (to bridge the funding gap),’ he said.

The game shift in the financial world is being paralleled by far-reaching developments stemming from the growth of internet and technological advances, Roger Orf, partner and head of European real estate at Apollo Global Real Estate, pointed out. ‘The pace of change is extraordinary,’ he said. ‘We’re seeing huge changes that are affecting how we live, work, shop and interact.’

Orf also fears the cost of money will go up and said it was difficult to make business judgments in an environment where governments are doing their best to keep interest rates down and where they should theoretically be up to 300 bps higher. ‘The implications are very profound.’

In the finance world, Orf said it was clear that 'London is in and banks are out'. But although non-bank lenders are coming to the fore, traditional banks still have the cheapest cost of capital, he pointed out. ‘That gives them an enormous capital advantage and profit opportunities.’