If scars are reminders of lessons learned during battles survived, the real estate lending market’s experiences of the global financial crisis in 2008 should have stood it in good stead for its current predicament during the Covid-19 pandemic.
“The emotional scarring that many lenders suffered in the GFC meant that there had been a very good legacy of caution and discipline,” says Peter Cosmetatos, chief executive of CREFC Europe, a trade organisation for the commercial real estate finance industry. “Lenders came into this crisis well-prepared. There hadn’t been over-lending or excessive exuberance.”
That has made much of the pandemic so far very different to past crises and cycles, Cosmetatos says, as has the growing variety of funding sources for real estate lending that sprung up in the wake of the last financial crash.
“The GFC led to a much more diversified market – we have a variety of sources of capital, lots of different ways of accessing commercial real estate and, indeed, commercial real estate debt,” he adds. “That has added resilience to a market and meant that as certain types of lender pull back, others have been waiting in the wings and willing to come forward. Those things have stood us in really good stead.”
But the market has nonetheless suffered. The most recent half-year report on real estate lending from The Business School showed new UK loan origination dropping by a third year-on-year over the start of the pandemic, with many lenders opting to make no new loans at all and focus instead on working with existing borrowers.
But allowing borrowers space “can only go on so long”, says Cosmetatos, who expects that “during the course of this year there will be quite a significant washing out, a sorting of the good and the bad”.
Jo Solomon, real estate finance partner at law firm Hogan Lovells, agrees. “We are very quickly coming to a point where we can’t carry on with ‘extend and pretend’,” she says. “Lenders are now starting to look at which borrowers they should support, and which were already in trouble.”
Willing and able
David Yeadon, executive director at SPF Private Clients, which offers real estate debt advice, sees a healthier market now than in the last crisis, even as signs of distress emerge.
He says: “The biggest variation from the financial crisis is that there’s a lot of liquidity out there, both from equity purchasers waiting to deploy, but also from a lender perspective.
“You have a whole raft of types of institutions that are very well capitalised. Debt funds have raised their capital, that needs to be deployed. The challenger banks have very strong balance sheets and very little legacy issues.
“Then you have specialist funds in development. European banks in the main have remained open for business. Insurance companies, even our UK clearing banks, they are very well capitalised, they are able to deploy and willing but they have been sidetracked looking after existing clients and immediate cash-flow positions.”
At challenger bank Aldermore, which opened its doors in the wake of the GFC, the goal has been to communicate constantly with borrowers and manage messaging. “We, like I’m sure most other banks, have been really keen to work [with] and support our existing customers through this,” says commercial director John Carter.
But that’s not to say there won’t be tough decisions to make over loan enforcement as greater signs of distress become clearer in particular sectors.
“No bank takes that kind of action lightly,” Carter adds. “Sometimes it’s taken with the agreement of the borrowers as well. In some ways we should act the same way now that we would anyway… You’re always looking at the reality of what that restructure or workout is going to be. Fundamentally, you work with the borrowers, and when borrowers flag up ‘this is what we’re doing, this is how we’re going forward’, you work with them. There’s a plan to exit.”
Change and challenges
For some market players, distress will open doors. Just as lenders such as Aldermore emerged in the wake of the GFC, so too may new firms find their start in the aftermath of the Covid-19 pandemic.
Aldermore’s Carter knows the challenges. “Any change creates some opportunity – but creating a bank isn’t an overnight thing,” he says, adding that the more buoyant market now than during the GFC might make establishing a new venture tougher.
“Liquidity was tight when Aldermore and other banks were founded,” he says. “Liquidity is really strong at the moment. So there are opportunities, but you’re coming into still quite a busy and competitive market.”
Nonetheless, Hogan Lovells’ Solomon expects more to make the leap. “As we move into more of a distressed situation, in whatever sector falls into that category, you’ll probably find those lenders that are more focused on that end of the market that haven’t perhaps been quite as busy in the last few years,” she says. “It’s going to be interesting to see those with a more aggressive strategy popping up.”
To send feedback, e-mail tim.burke@egi.co.uk or tweet @_tim_burke or @estatesgazette
