Monday 27 June 2016, London - 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 EUR2.1 trillion of invested CRE stock at the end of 2014, an estimated EUR978 billion 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 €250 billion 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.”
1 APL: Association of Property Lenders; CREFC Europe: Commercial Real Estate Finance Council Europe;
INREV: European Association for Investors in Non-Listed Real Estate Vehicles; and ZIA: German Property Federation.
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 Director 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.”
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For further information please contact Johlyn da Prato, INREV
johlyn.da.prato@inrev.org +31 (0) 621397456
Notes to Editors
About APL
Established as the Association of Property Bankers in 1991, the organisation has gone from strength to strength over more than two decades to become the respected and vibrant group it is today, with around 500 individual members involved in real estate lending. In 2012, the organisation changed its name to the Association of Property Lenders, reflecting the wider range of debt providers in the market and the increasingly diverse membership base. Despite the changes over the years, one thing has remained at the heart of the organisation since inception; to further the effectiveness of the real estate lending industry by fostering a community where its members can enjoy meeting, sharing and learning. The organisation has successfully achieved this by organising a varied calendar of educational and social events throughout the year, as well as working with other bodies to ensure the membership has a collective voice in the real estate lending community.The APL is run voluntarily by a Board of elected Directors from across the industry. www.the-apl.com
About CREFC Europe
CREFC Europe is the trade association for the commercial real estate (CRE) finance industry in Europe. Our mission is to promote transparent, liquid and sustainable CRE debt markets for the benefit of our members, the wider industry and ultimately the economy as a whole. We are the meeting place for CRE lenders and debt investors of all kinds and the collective voice of the industry in communicating with policymakers and regulators, the media, property owners and debt investors. www.crefceurope.org
About INREV
INREV, the European Association for Investors in Non-listed Real Estate Vehicles, was launched in May 2003 to act for investors and other participants in the growing non-listed real estate vehicles sector. The non-profit association is based in Amsterdam, the Netherlands. INREV aims to create a forum for the sector and increase the transparency and accessibility of non-listed vehicles, to promote professionalism and clarify best practice and to share and spread knowledge. INREV currently has 385 members drawn from leading institutional investors, fund managers, banks and advisors across Europe and elsewhere. In 2015, 40 new members joined INREV. www.inrev.org
About ZIA
German Property Federation or ZIA, is a regulatory and economic lobby group for policy in the property sector in Germany. The confederation was founded in 2006 by well-known companies from the property sector in Berlin and is a member of the Federation of German Industry (BDI). At European level the ZIA is represented in Brussels and is established there as the German Property Federation. Today ZIA speaks for over 37.000 companies from the German real estate sector. The President of the Federation is Dr. Andreas Mattner, member of the executive board at ECE Projektmanagement G.m.b.H. & Co. KG. zia-deutschland.de