European Real Estate Snapshot

A monthly in-depth coverage of the latest developments in the European Real Estate market.


August 2019

Focus of the Month

UK Development Finance Market

2017 saw a boom in the development finance market. In the UK particularly, with some real estate asset types facing difficulty, debt providers were increasingly drawn to the strong fundamentals that residential development projects offered. Rest of Europe also followed suit, but majority of the action is concentrated in the UK. In 2018, there was a surge in the Build-to-Let (BTL) or Built-to-Rent (BTR) market, with investments inflows coming in from foreign sources. However, the regulatory environment is not as conducive to the business as developers would have liked, leading to delays in construction and suppressed profit margins. But this has not entirely deterred new entrants, and there is still a considerable amount of activity in the UK market, with new entrants, particularly FinTech players present on the scene.

There has been a shortage of housing in the UK, and the government wants to tackle this with construction of 300,000 new homes per year. This has presented an abundance of opportunities for debt providers in this asset.

  • Supply of debt capital is scarce – Traditional banks have been drifting away from development financing since the financial crisis, and this has opened new avenues for funds, though it has not yet been fully tapped.
  • Margins – Residential development loans are priced up to 8 percentage points above senior loans, due to the construction risks which the lender must take on.
  • Barclays has partnered with the UK government and launched a ₤1 billion housing development fund to increase the pace and volume of housing provision. Loans range from ₤5 million to ₤100 million and will be extended to developers, with the aim at diversifying the housing market and involving more small and medium sized businesses.
  • Obstacles – Despite the government playing a major role in boosting home building in the UK, there are several obstacles in reaching the goal of 300,000 houses per year. The dominant reason is the political and excessively bureaucratic planning system. This is leading to developers focusing more attention (in terms of time, financial resources and energy) on the planning process, than on the delivery of new homes.
Rise of the BTR / BTL market

The Built-to-Let market has gathered momentum in the backdrop of housing shortage and an increasing demand for second (and even third) homes in the UK.

  • In 2017, there was an inflow of foreign investments from the US and Canada into this sector and lenders capitalised on it.
  • As regulatory pressure increased over the years, sales have been taking longer and this is leading to higher marketing costs and longer development durations, thus putting pressure on developers’ margins. To add to this, the uncertainty in the market means housebuilders can’t rely on the stability of GDVs over the development lifecycle.
  • However, new players are still entering the market and the established ones are introducing new products. For example, Hodge Bank launched a product created for professional landlords and provides one loan which deals with their entire residential portfolio. West One launched a new first charge BTL mortgage range. Molo Finance is a BTL lender in the market.
  • Building societies in the UK have been launching new BTL products. Below are some of those launched in the last 6 months:
    • Skipton Building Society, UK’s 4th largest building society, has launched five new BTL intermediary-only mortgage products. These products are for purchase or re-mortgage.
    • Leeds Building Society, the 5th largest, has launched an “easy-start” BTL mortgage for landlords with 0% interest rate for the first 3 months, with products lending at up to 70% LTV.
    • Mansfield Building Society has introduced two new BTL mortgage products focusing on expats who want to let out their UK properties while living overseas.
    • Melton Building Society, one of the oldest in the UK has launched a fixed rate BTL product with a comparatively lower interest coverage ratio.
Is the property development landscape changing?

In 2018, new development finance reached ₤8.8 billion, of which ₤5.2 billion was for residential development. This number is ₤1 billion less than the 2017 equivalent.

  • Investigations around why this sector has witnessed a drop in profitability has surfaced multiple reasons. Many blame Brexit and the uncertainty around it, but regulatory changes (particularly in London), land prices and market fundamentals are responsible as well.
  • The buyer occupier market is shrinking. There is a 3% stamp duty on second houses which was introduced in 2016 has also contributed to a reduction in BTR landlords buying in London. “Help to Buy” ends in 2024 and will not drive the market in the long term.
  • Since development and sale durations have increased (due to more regulatory pressure), developers have had to reassess their exit strategies in the current climate. Some developers are choosing to hold and rent until the market picks up, instead of exiting right away, but that requires the developers to obtain refinancing on the expensive development loans. Thus, relying on multiple sources of funding, the associated entry and exit fees as well as time taken with arranging each, puts the developers’ margins under pressure.
  • Even though multiple loans for each development means that new loan facilities have proliferated, the lending business is not without difficulty. Due consideration of the risk factors is important at the time of underwriting and monitoring performance continuously is necessary.
Debt Market - some recent transactions/events
  • Urban Exposure – a UK based development lending company, lending to residential developers aims to raise ₤50 million from a bond offer, which is the first tranche of a ₤500 million programme. There is a double protection on this bond, a first charge on the developers’ properties and a guarantee from Urban Exposure the PLC. The loans would have a hard ceiling of 75% LTGDV. The coupon of 6.5% with the interest paid twice a year in arrear and maturity in 2026.
  • UK P2P finance company Lendy collapsed in May as ₤90 million out of its more than ₤160 million outstanding loans were in default.
New Platform Launches

Some of the new development lending platforms launched are:

  • Hilltop Credit Partners – A specialist funding partners for small and mid-sized UK residential property developers. They provide financing to developers with established track record, who are market experts but need capital to scale their business. Financing provided is up to 90% LTC, across the capital structure.
  • Proseed Capital – A principal real estate lender providing innovative financial solutions to small and medium sized property developers. Financing provided is up to 80% LTV and 100% LTC, across the capital structure, as well as second charge bridge financing.
  • Santander UK launched a ₤200 million development financing platform with Topland Group, a private investment firm. Loans provided will be up to 75% LTC and 65% LTGDV. Priority will be given to financing the development of family homes, townhouses, suburban homes and modern family dwellings, for sale to the local domestic market within established communities.

European Markets Overview

Key Themes

Omni-channel retail model driving demand for logistics
  • Retailers are gradually shifting from their traditional bricks and mortar retail and e-commerce models to omni-channel retail model where the retailers attract shoppers by combining their physical and online stores to provide a seamless experience and shorter delivery time.
  • This model is becoming increasingly popular in both the US and Europe. It solves the lack of customer analytics, internal integration and poor data collection along with customer acquisition across the supply chain. A recent survey by CACI suggested that retailers who have both physical and e-retail stores have 50% higher sales as compared to e-retailers who do not have physical stores.
  • The emergence of omni-channel retail has energized the demand of logistics space. Suppliers are now demanding larger warehouses to manage individual pick-ups and returns related to omni-channel retail.
  • The demand for logistics space is also affected by increasing obsolescence of warehousing spaces in the two continents. This lack of suitable and available spaces will further drive up the demand, especially in key locations in Europe.
  • The structural shift in the retail model there has led demand and supply mismatch of land for industrial use which has put pressure on the rents. Modernized logistics spaces in prime locations provides immense growth opportunities to the investors.
US Pension Funds' increasing stake in the European market
  • US pension funds and retirement systems have been increasingly growing in number and investments in the European market. This growth can be attributed to improving market conditions of Europe and better overall portfolio risk adjusted returns through diversification.
  • They have committed USD 1.9b in the first two quarters of this year in real estate private equity funds. Teacher Retirement System of Texas has made a decision to allocate USD 300m to a pan-European real estate fund.
  • Germany has become a lucrative destination for investors given high returns from real estate accredited to the drastic rise in rental income located in prime areas. To capture this opportunity, investors are willing to increase their risk appetite.
  • As the European economy begins to strengthen and enter into a sustainable growth stage, investors have new investment avenues in a more liquid market where rental incomes are growing at a fast pace. Foreign investors still face risk exposures driven by the uncertainty surrounding Brexit and foreign currency fluctuations.
Global logistics boom could be threatened by global trade wars
  • Currently, the global logistics space is in an overdrive where the demand far exceeds the supply for such spaces. This boom is supported by the phenomenal rise of the e-commerce sector throughout the globe.
  • But as the trade war between US and China escalates, the goods of these countries have become expensive which hinders the logistics space demand based on trade. This may cause logistics investments and valuations to decline.
  • The impact of these intensifying trade barriers will affect airport and port located assets. Globally there are signals that trans-shipment of goods in the US, China and Southeast Asia markets have taken a hit.
  • Despite the fact that the current consumer spending growth is still ongoing, trade wars can dampen consumer spending as goods become more expensive and could further dampen the demand for industrial real estate in Europe.

Funds in the Market

Strategy Institution Regional Focus Asset Focus Status Fund Size (mn)
Opportunistic Blackstone Pan-Europe Diversified First close € 8,900
Core-plus-value-add PAG and Gaw Capital Pan-Asia Diversified Raising $ 2,250
Real Estate Debt Torchlight Investors US Diversified Closed $ 1,680
Real Estate Debt Generali Pan-Europe Diversified Raising € 1,500
Value-add BlackRock Pan-Europe Logistics, Privately Rented Apartments Raising € 1,250
Opportunistic, Value-add Patron Capital Western Europe Diversified Raising € 800
Real Estate Debt ACORE US Diversified Closed $ 556

Recent Transactions

Snapshot of Key Deals
Asset Name Buyer Seller Asset Type Location Price (mn)
Heuston South Quarter (HSQ) Henderson Park Marathon Asset Management Mixed Use Dublin € 222
Silesia Star and Retro Office House Globalworth Poland Real Estate LC Corp Office Poland € 113
Office Building Fidelity International Real Estate Fund NIBM and AXA Investment Managers Office Paris € 98
East Gate and Schanzenstrasse 76 Undisclosed Investor CLS Residential Germany € 57
Office Building CCLA Aviva Investors Office Bristol £35
Asset Name Lender Borrower Asset Type Location Loan Amount (mn)
UK Retirement Living Lloyds Bank, Oz Real Estate PegasusLife Group Retirement Living UK  £ 525
Central London Portfolio Canada Life Investments Undisclosed investor Mixed Use Surrey £ 180
Paris Office Portfolio Natixis Swiss Life Asset Managers Mixed Use Paris € 507
Pressehaus am Alexanderplatz pbb Deutsche Pfandbriefbank GEG Group Office Germany € 170
Corti di Baires Development M&G Investments Meyer Bergman Mixed Use Retail, Residential Milan € 118

Key Indices

Key Indices 30-06-2019 YTD 1-YEAR 3-YEAR 5-YEAR
MSCI World Real Estate 223.91 15.9% 7.5% 6.4% 16.8%
STOXX Global 1800 Real Estate 278.78 15.9% 8.0% 7.4% 17.5%
STOXX Europe 600 Real Estate 167.89 6.9% (6.4%) (6.3%) 12.0%
Dow Jones US Real Estate 353.52 19.4% 9.6% 6.2% 26.6%
STOXX APAC 600 Real Estate 258.16 11.5% 6.0% 7.7% 5.1%
Property REITS - Europe 30-06-2019 YTD 1-YEAR 3-YEAR 5-YEAR
Retail 50.64 (13.0%) (36.3%) (48.7%) (53.3%)
Office & Industrial 278.78 15.9% 8.0% 7.4% 17.5%
Property REITS - US 30-06-2019 YTD 1-YEAR 3-YEAR 5-YEAR
Retail 376 (7.8%) (17.4%) (39.4%) (21.3%)
Office 332.16 14.5% (2.4%) (11.6%) 1.1%
Healthcare 188.07 15.6% 18.3% (4.3%) 10.3%
Industrial 426.90 32.2% 20.1% 43.7% 103.6%
Diversified 265.83 26.6% 15.2% 28.7% 50.9%


This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material is not financial research and was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and Oxane Partners has no obligation to provide any updates.

This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. The information contained in this presentation is not intended to be used as a general guide to investing, or as a source of any specific investment recommendation.Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Oxane Partners to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice.Sources: PERE, Real Estate Capital, Gulf News, South China Morning Post, Savills, Knight Frank, Deloitte, JLL, Institutional Real Estate, Bloomberg, propertyfundsworld, Cushman & Wakefield, Heitman, Urban Land Institute, Financial Times, SWFI