When will distress materialise and where are the opportunities in the meantime?

Written by Helen Richards
 

Two years ago, the European real estate market began to forecast a wave of distress, similar to that of the Global Financial Crisis (GFC) when large-scale restructuring of real estate portfolios occurred, largely made up of NPLs and M&As.

Two years on, this wave of distress is yet to materialise. Loans may be reaching maturity, but both sponsors and lenders are agreeing to waivers and extensions, and NPL transactions on the scale that was expected are simply not emerging.

Despite anticipation from market players for transaction volumes to pick up earlier rather than later, hesitancy from investors prevails. With this in mind, GRI Club united some of the most senior real estate voices to take stock of the situation, understand their sentiments and perspectives, and ask what will trigger the market to gain momentum?

This exclusive GRI report reveals an in-depth analysis of the three discussion sessions which took place during the ‘GRI RE Distress & Financing Opportunities Forum’.

Read the full report here.

The absence of core money in the market is contributing to the lack of transaction volume, participants agreed. (Credit: GRI Club)

Discussions revealed very low rates of restructuring occurring in the market at present - different to the GFC - and rather refinancing being the preferred solution for struggling assets.

When it comes to refinancing, however, the market is experiencing a number of consensual stand-stills between lenders and sponsors. Often, lenders refrain from enforcing the sale of an asset or taking ownership for lack of a better plan than the sponsor. 

A number of theories around what is inhibiting full scale distress in the European real estate market were discussed. Perhaps the maturity wall is yet to hit in its entirety and it’s a simple matter of time, or perhaps the bid-ask spread is just too large. One participant reported that the few attempted transaction experiences felt more like a price discovery process than anything else.

It was also suggested that more activity will come as values start to settle. Following the global disruption caused by the COVID-19 pandemic, it was an almost impossible task to value real estate assets - a situation that continues until now for office assets.

However, as fundamentals begin to settle, the possibility of non-consensual activity and forced sales will arise, consequently driving more consensual activity and bringing market momentum back.

The amend and pretend strategy while waiting for lower interest rates in the near future is not adequate for those assets shy on time, and pragmatism is required to make tough decisions and carefully consider whether to put more money into certain assets.

The amend and pretend strategy while waiting for lower interest rates in the near future is not adequate for those assets shy on time. (Credit: GRI Club)

Vacancy rates remain low across European real assets in a number of sectors. These strong occupier fundamentals were highlighted as a significant difference between the current real estate scenario and that during the GFC.

Operationally, assets are generally performing well and demonstrating dependable cash flow and income, helping to compensate for the shock to the capital stack and coverage ratios caused by soaring interest rates. Where lenders have confidence in the operational strength of an asset, sponsors can buy time -  a tool being used in abundance in the market at the moment.