On the way to December 22, 2021 – The way forward: a European perspective | Cadwalader, Wickersham & Taft LLP


In this final edition of REF News and Views for 2021 we attempt to summarize the main market movements and activities that we have observed within the European real estate finance industry – how this has both impacted 2021 and how it is likely to continue / change in 2022 and to move forward in the short / medium term. This article also introduces a number of topics where we intend to focus more on legal business analysis in 2022, as liquidity continues to drive competitiveness and climate change continues to impact decisions. business and legal / regulatory environment.

Anyone who has attended, physically or remotely, some of the keynote speeches at the flagship real estate conferences in Europe in 2021 (like the INREV conference in Stockholm) will have heard a lot of information about the ‘bounce back’ that we have seen both in Europe and internationally further in our sector – a rebound fueled by an unprecedented product of liquidity seeking and capital investment. Across all levels, from consumer spending on Main Street to the deployment of savings fund capital, activity has been frenetic. Sales of durable retail goods (mostly spending on their housing) grew on average by around 25% in 2021, an unprecedented increase since 1946, as people started spending again. With the reopening of High Street, spending returned quickly in some areas. Many analysts were quick to say that this was not a “recovery” as there had been no real recession in 2020, but rather that the global economy had simply gone to a “big time”. vacancy ”European style in 2020, stopped by fear of COVID, and simply reopened.

The High Street spending will no doubt help our struggling retail sector. The question is whether spending on durable retail goods will have a greater impact on general retail spending. We have seen many business park loans being placed on the special service teams of commercial lenders, and while there has been a recovery in the industry, there is a need for funds to look at asset reallocation. After all, there are only a number of shopping centers that can be converted into residential. We believe borrowers and lenders will need to work together on consensual exit strategies to maximize collections and performance.

The good news is that, from a new lending perspective, there is a lot of capital being deployed in high performing real estate, including important specialty sectors like life sciences, data centers and specialty healthcare, as well as some undervalued / oversold retail businesses, with new funds coming from around the world. Bond issuance was also strong. The coupon attached to unsecured corporate bonds (operating with slightly lower leverage and higher income covenants) is often more attractive than traditional senior mortgage financing. It may sound counterintuitive, and in many cases too good to be true, but these offers do exist. The cost to the Funds / Borrowers of issuing these Bonds is not only lower, but often results in much less internal reporting and maintenance, as the packages of covenants attached to the financing of the Bonds are essentially more “lightweight” , the financial covenants and the negative promises being relied on and less involvement of the lender at the level of the individual real estate asset. Since the majority of traditional first mortgage lending in European operations is still on a limited recourse “special purpose” basis, it is often fairly straightforward to issue bonds to refinance structures. existing structures without substantial costs to create new autonomous structures. We would be delighted to discuss with our customers how to achieve this.

It would be remiss to sign 2021 from the point of view of the REF without touching on climate change. Legal / regulatory requirements will undoubtedly increase and should be part of our decision-making processes in the REF sector. Decarbonization will have an impact on yield. Stricter decarbonization regulations are inevitable given that real estate accounts for around 40% of global greenhouse gas emissions. Relying on carbon taxes is short term. It’s fair to say that the overwhelming consensus is that carbon taxation will only slow the same destruction to our climate, so essentially the time for those measures is over. Much has been said that the 2020s will be the time to implement sustainable investment strategies now. Essentially, the message seems to be that the time to talk is over – we need to act. Importantly, this seems likely to impact valuations in the near future, as few buildings are currently valued on a basis that includes decarbonization costs. Another trend we expect to see is an increased focus on reallocating existing buildings rather than new construction.

In particular, we believe that lenders and borrowers need to consider the cost of the transition so that they are not left behind with stranded assets due to climate change. This means diversifying risks within portfolios, seeking to mitigate insurance barriers, etc. and review ESG plans. Funds are likely to have more stringent action plans demanded by their investors / government and regulations, and failure to comply could have very damaging impacts. European funds and investors in particular are reallocating capital to climate-friendly and ESG-friendly funds and strategies at a significant rate, and the EU’s sustainable finance regulations and taxonomy are already showing their impact.

Finally, we wish our readers a happy and prosperous 2022 and look forward to continuing to work with you.

About Kristopher Harris

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