The lay of the land

Leo Civelli, CEO of Duff & Phelps Real Estate Advisory Group, discusses the effects of Brexit in the UK, further challenges facing the European markets, and the opportunities that lie in the non-performing loan space

What effect has the UK’s exit from the EU had on the real estate market, and what long-term impacts do you expect it to have?

If the EU and other countries would adopt legal and fiscal policies favorable for the UK banks, for the owners and employers, then Brexit could create ‘soft’ effects on the real estate market. On the otherhand, if foreign governments would develop restrictive policies that give many boundaries to UK banks’ operations, Brexit could produce ‘hard’ effects.

What are the main challenges facing real estate investors looking to invest in Europe? Where do you see the main opportunities?

Real estate investors will see challenges related to the socio-demographic evolution of the European population. The growing number of aging citizens is influencing the development of nursing homes, while the so-called ‘Erasmus’ phenomenon, allowing EU students to spend time studying abroad, is increasing the demand for accommodation for both high-school and university students.

The retail and office sectors are also changing their way of doing business (for example with ecommerce, smart working and home working), and the demand for spaces is rising.

Are there any upcoming regulatory changes that investors will need to adapt to?

Basel IV and the ongoing review of continental European banks’ internal ‘special asset classes’ rating models could bring important changes. The same goes for the insurance and pensions sectors, which are having to adjust their business to requirements under the Solvency II.

The NPL market is growing. Where do you see the main opportunities for acquiring these portfolios?

Looking at the evolution of regulations and related recent non-performing loan (NPL) deals, in addition to the well-known opportunities in Italy and Spain, you can expect to find opportunities in other areas of Southern Europe. In particular, potential markets are, Portugal (16.4 percent of NPL to total gross loan) and Austria and Central Eastern Europe (average of 7.1 percent of NPL to total gross loan).

Finally, it is important to keep our eyes on the second phase of the deleveraging of the Irish NPL, the large and non-addressed German stock and, despite the skepticism of some investors, the evolution of Greece and Cyprus. They are all areas in which we can expect big movement.

Are you seeing any trends emerging in the way in which investors have started to finance deals?

The private equity funds are one of the most interesting examples of emerging trends for financial deals. The funds are changing their role in the relationship with the asset owner, becoming not only a landlord, but also a business partner. In this sense, the private equity funds are playing an increasing role for the core business of the company. They are showing a strong ability in the management of the in-out timing of the company’s business. And, obviously, the cost of borrowing would be higher than in the past

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