European real estate’s credit cycle is turning - but the benefits of scale remain

After years of uncertainty, Europe’s real estate debt market is showing signs of renewed momentum. Falling interest rates and the stabilisation of rate expectations have brought buyers and vendors closer together on pricing, creating a platform for transactions at more realistic valuations. The consequence: rising demand for acquisition financing.

David White, head of LaSalle Real Estate Debt Strategies, Europe, at LaSalle Investment Management

Real estate debt financing volumes have actually remained reasonably stable in recent years, despite challenged asset price discovery and subdued deal activity. Refinancings have continued to account for a larger proportion of total lending in recent years, picking up the slack from lower transaction volumes and more recently a slowdown in development starts. The dynamic within many lenders’ deal pipelines is one where the individual levers of buying and building or refinancing move in inverse directions, but the overall demand for debt has remained remarkably steady.

For managers, the key to insulating from the swings in demand for different products is to pursue a flexible investment mandate that spans refinancings, development loans and acquisition finance. Of course, these need to be supported by a wide range of skillsets supporting a platform capable of sourcing, underwriting and also asset managing post-closing over the life of the investment.

In our experience, LaSalle’s ability to keep putting capital to work, regardless of where we are in the cycle – with more than €700 million in gross loan commitments extended across Europe in the past 12 months - has been a major draw for LPs. That track record of consistent deployment was a significant tailwind in our recent capital-raising success, bringing in more than $1.7 billion in the past year for LaSalle’s global real estate debt platform.

The scale and diversified sourcing model required to achieve that level of flexibility in deployment offer additional advantages in today’s market environment. There are multiple reasons to believe that the biggest, best-established and most well-resourced platforms may continue to outperform, even as acquisition volumes rebound. This is particularly evident in the amount of capital we have returned to our investors across historical investment vehicles, another differentiating factor.

First and foremost, managers with the ability to deploy capital across the full capital structure, across sectors and across geographies will remain best placed to maximise the opportunity by partnering with sponsors on a wider range of new deals.

Sitting alongside equity investment colleagues and being supported on a daily basis by both the debt and equity asset-management teams as part of a bigger platform offers further benefits for a non-bank lender. That institutional know-how can help lenders to better anticipate borrowers and sponsors’ needs and can periodically provide an additional lever for value preservation.

Meanwhile, we can also draw on the expertise of our dedicated sustainability team to better meet continued borrower and LP demand for green loans. Structuring loans that incentivise borrowers to invest in improvements in assets’ sustainability levels, in turn benefitting from improved and more consistent operating costs as a way of creating future-ready assets, remains a core element of our capital deployment and a source of competitive advantage over our peers.

Finally, in what remains a stock-picking market for all investors, where credit selection is determined asset-by-asset and market-by-market, access to real-time market data from our equity business and bolstered by in-depth proprietary research and insights, can help sharpen underwriting and portfolio construction decisions.

The composition of European non-bank lenders’ deal pipelines – with the dominance of refinancings slowly giving way to higher levels of acquisition finance - tells the story of a credit cycle beginning to turn. But the winning formula of certainty of execution in creating structured, bespoke solutions at scale, supported by dedicated in-house resource in asset-management, sustainability assessments and integrated research, remains unchanged.

David White is head of LaSalle Real Estate Debt Strategies, Europe, at LaSalle Investment Management