Eurozone Investors, Including REITs, Face Further Cap-Market Uncertainty

A recent survey by Ernst & Young shows an even split on positive and negative views on CMBS funding. But when viewed at the country level, the results become much more telling.

Compiled by Ernst & Young’s Global Real Estate Center

Investors across Europe have divergent views on the prospects for a revival of the CMBS market in 2012, according to a survey conducted by Ernst & Young. A full 43 percent of respondents have a positive outlook on CMBS as a funding source — and 43 percent have a negative view. A more insightful trend, however, emerges at a country level.

Investors in some of the more “mature” economies surveyed are the most pessimistic about prospects for CMBS. Only 29 percent of those in Germany, for example, where financial markets are relatively developed, see the upside for CMBS issuance. And in the UK, where CMBS levels were significant before the 2008 crash, only 41 percent see the market coming back next year.  In rapid-growth markets such as Poland and Russia, confidence abounds. This may be due to the relative lack of CMBS issuance pre-crisis and the comparatively unscathed nature of investors in real estate financial instruments in those markets.

With the uncertain nature of CMBS funding, further analysis is warranted on a country and intra-country level.

Of the investors surveyed, 42 percent expect that equity capital markets will become more attractive in 2012 for real estate asset investors.  This is hardly a pronounced trend, but following the volatility in equity markets in 2011, suggests a more positive picture than some commentators and analysts have projected.

As with many of the other topics analyzed in the EY report, there is a wide variation in trends by country. Germany, a market more resilient to ongoing turmoil than most, sees only 16 percent of respondents predicting improvement next year. On the other hand, Spain, a market in some distress, sees 60 percent of respondents with hopes and expectations of an upturn in equity financing for real estate investments next year.

Insurers to provide increased debt funding

As volatility in capital markets continues, reliance on traditional funding sources is proving challenging. Because of this, attention has turned to “alternative” sources of debt finance such as insurance companies.

More than half of survey respondents, 55 percent, believe that insurers are likely to become more active providers of debt financing for real estate assets in the coming year.

Given developments around insurance regulation, namely Solvency II, this would seem to resonate. And since insurers often aim to immunize (i.e., match) the time horizons of at least some part of their portfolio with their liabilities, investments in bricks and mortar seem worthy of consideration. But the picture is not consistent across the European market.

While around half of respondents in most countries see increased insurer funding as likely, only 36 percent of investors in Austria share this view. On the other end of the spectrum, an overwhelming 85 percent of Germany-based respondents are of the belief that new debt finance is likely to originate from the insurance industry.

Banks to limit funding in some cases

Ongoing difficulties in the banking markets have caused a number of high-profile failures and retrenchment from lending to certain asset classes, including real estate.  Fifty percent of respondents to the survey expect this trend to continue over the coming year and for lenders to reduce the availability of capital for real estate loans.

While other funding sources such as insurers, equity and CMBS may become increasingly available in some cases for lending to real estate in 2012, it is unclear whether these new funds will cover the shortfall from banks who may be stepping back.  The exact level of bank aversion to real estate financing varies substantially by market.

Fewer than one-third of investors in Austria expect such a reduction in funding to occur, while 70 percent in Germany take that view.

The lack of consistency among neighbors, let alone across Europe, in this respect is obvious. Investors wishing to access funds to finance real estate investments would be well advised to seek further insight into market trends.