Cause for Optimism in Europe: 3 Questions with Lisa Williams
Many U.S. investors have moved to the sidelines in 2023 amid higher interest rates, disruptions in capital flows, and uncertainty about asset values. But in the European Union and United Kingdom, there's cause for optimism, according to Lisa Williams, Head of Europe for SitusAMC. She talks about the sectors, geographies and trends that are fueling her positive outlook.
What specific sectors and geographies are causing you to feel optimistic?
Hospitality demand is huge across Europe as travel has really opened up this year. The demand for hotels is high, which is also reflected in the pricing. But hotels are faced with staff shortages, therefore they are not able to operate at full occupancy. Countries like America and those in Asia experienced a longer travel ban than most of Europe. Therefore 2023 was the first year that people were able to travel freely, and we saw travel rebound to pre-Covid activity levels. In 2023 we have seen a number of luxury hotels open across Europe, and others expanding over the next 18 months. In addition, life science and data centres are also in demand. We have seen an increase in build-to-rent (BTR) and private rental scheme (PRS), as lenders are bullish on those sectors.
Ireland is a busy market and we have seen high volumes this year. Whether it's student accommodation or PRS schemes, the market is buoyant on the residential side as well. Ireland is obviously extremely attractive to overseas companies because of the corporate tax regime. Many tech companies have their headquarters there.
In the U.S., more than a $1 trillion in commercial real estate debt is coming due before the end of 2025. Higher interest rates and a more cautious lending environment are making it challenging to refinance. Some asset values are declining -- particularly in office -- as hybrid work appears to be here to stay. Are you seeing similar trends in Europe?
The volumes are down. Lenders are much more cautious. Values have decreased in the office market despite strong take up on the new City of London office sector. Retail is another asset class in which values have decreased, although some retail centres are reporting foot fall has increased, which could be attributed to people’s working arrangements. Industrial and logistics portfolios are still strong and values remain steady. We are still seeing a lot of a lot of loans that are extended for even short-term extensions. We have seen a fair number of refinancings. Lenders are cautious on offices in Canary Wharf, as a number of major companies have decided to relocate back to the city of London, taking less space.
Coming back from the pandemic and Brexit, we had an exceptionally busy 2022. We haven’t seen wholesale moves of corporate headquarters or debt funds moving outside the UK. The City of London is still very much the place to be. Most big investment banks and equity houses are still based in London. Most firms work either a hybrid schedule, as we do, or are back in the office four to five days a week.
What other big trends are you seeing?
We are seeing more U.S. lenders looking to expand in Europe. In addition, more European investment banks are looking outside their own walls and partnering with third-party solution providers for their servicing, asset management and valuation needs. The outsourcing model has long been accepted in the U.S., but it's less prevalent in the EU and UK. But we are even seeing it grow in places like Germany, which is traditionally a difficult market to outsource.
The other big trend is Environmental, Social and Governance (ESG), which is playing a material role in the UK and EU markets. It's very much in the forefront of clients’ minds. They are being asked by their credit committees about the ESG ratings on buildings they are lending on. You now have ESG agents on deals, which is a role we perform. Borrowers will receive decreasing margins if they hit certain hurdles on ESG ratings. The impact of the war in Ukraine on energy prices is also filtering into the desirability of efficient buildings with strong ESG ratings.
Learn more about SitusAMC's servicing, valuation, asset management and advisory services in Europe on our website.