Policymakers need to ensure that future regulation of the banking industry and other sources of finance does not undermine the positive contribution that commercial real estate (CRE) debt makes to the European economy.
A new report from APL, CREFC Europe, INREV and ZIA1 demonstrates that debt, as a principal component of CRE capital, facilitates the contribution that the real estate industry makes to the European economy. Of the estimated €2.1tn of invested CRE stock at the end of 2014, an estimated €978bn is financed by debt, representing approximately 47% of the value of CRE holdings.
As regulators continue to wrestle with the appropriate level of supervision and regulatory frameworks for different parts of the debt industry following the global financial crisis, a better understanding of the role played by CRE debt in the economy – including the benefits it provides – could support well-informed policymaking.
The Commercial Real Estate Debt in the European Economy report explains why and how debt forms an essential part of the CRE economy. The report sets out the benefits CRE debt unlocks, including providing premises that businesses can rent flexibly, facilitating new construction and ongoing investment into the built environment, and contributing to employment directly and indirectly. It also discusses the attractions of loans secured on CRE for many investors.
On average, development and re-development of new and existing CRE amounts to €250bn of capital investment per year, representing 10% of total capital investment in Europe. The CRE debt industry is itself a significant employer of highly specialised people in an increasingly diverse and innovative part of the financial system. It also indirectly supports the jobs of the 3.8 million employed by the CRE sector in Europe. CRE debt has an especially important role to play in unlocking construction activity, which provides the majority of direct employment in the CRE sector.
Matthias Thomas, CEO of INREV, said: “This report shows that real estate debt is as important a part of the equation as equity when it come to the industry’s contribution to the wider economy. Financial regulation needs to safeguard economic stability but we also want to ensure that policymakers have the right information to hand about debt’s positive benefits to be able to make informed decisions about any future policies.”
The report also outlines changes seen in the structure of the CRE debt industry that reflect a maturing sector. Pre-crisis, bank lending accounted for approximately 90% to 95% of European real estate lending. Neil Odom-Haslett, president of APL, said: ”The scarcity of CRE debt from traditional banking sources in the years immediately following the GFC created an opportunity for a range of new lenders including insurance companies, non-listed debt funds and distressed debt funds.”
This means that while banks remain a major source of CRE debt, their share of new lending has reduced. The most recent analysis of the UK lending market for 2015 by De Montfort University indicates that banks accounted for 75% of new CRE lending with insurance companies and debt funds comprising 16% and 9% respectively.
Peter Cosmetatos, CEO of CREFC Europe, said: “Debt accounts for close to half of the capital that is productively invested in shops, offices and other commercial buildings that make Europe’s towns and cities what they are. It is of course important that regulators understand the risks CRE debt can present to financial stability – but it is no less important that they appreciate the vital, enabling function it performs in the economy, and the attractions it holds for diverse lenders and investors. This report is a great step forward in painting that bigger picture.”
Finally, the report looks at the impact of existing regulation on the banking industry and highlights a number of unintended consequences. One such consequence has been the creation of regulatory silos from the perceived urgency to put in place regulation for individual components of the financial system piecemeal. This has limited the extent to which regulators are able to maintain an overview of the interaction of separate regulatory changes.
The relatively sudden diversification of CRE debt provision has also created unresolved challenges for regulators who need to ensure regulation is appropriate for each different type of lender, but also fair so that competition is not distorted unnecessarily. That balancing act, combined with the need to protect the supply of credit to the real estate economy, presents policymakers with a task that is made even more difficult by the variety and complexity of the regulatory frameworks applicable to, in particular, banks and insurers.
Dr. Stephan Rabe, managing birector of ZIA, said: “The industry is supportive of the need for better regulation and supervision of the CRE debt industry. However, we would encourage policymakers to take a more holistic approach to regulation and understand the importance of creating a competitive but fair landscape for the industry.”
