Commercial Insights - Real estate debt: the view from our Restructuring and Recovery team
Will Matthews, Head of Commercial Research, speaks to Marc Nardini, Partner and Head of Knight Frank’s Restructuring and Recovery team.
5 minutes to read
Will Matthews (WM): Marc, to what extent has the pandemic resulted in client distress so far?
Marc Nardini (MN): To set the scene – lenders pre-pandemic had some stress in their portfolios, particularly in the wellpublicised sectors such as retail, and to an extent, residential developers, and the pandemic has proven itself to be a catalyst to speed that up. For example, retail has recently gone through a cycle that normally would have taken a number of years in the space of 14-15 weeks.
The same applies for developments with both residential and commercial, and also now for hotels, which as a result of the pandemic have really come under pressure. So, lenders are really in a tough environment at the moment, one where they’re all taking stock and having to look at their risk and exposures, and having to mitigate that.
I wouldn’t really say that lenders are seeing distress per se at the moment, because of all the support due to the economic scenario we’re in, as well as the moratoriums against enforcement acts, I don’t think there’s actually distress out there in the marketplace. There is certainly stress where lenders are looking at their exposure to risk, but until we wean off the support that we’ve got out there at the moment, I don’t think we’re actually going to be able to address how much distress there is. But certainly what we’re seeing across the market are lenders really drilling down into their portfolios to look at their risk exposure as a whole.
WM: Are there any sectors which have fared particularly well/badly?
MN: Again, to set the scene, it’s very different from what we saw in 2007. There is very much a split market space at the moment where there are asset sectors that are trading and performing quite poorly against a backdrop of those that are trading very well. Sectors such as logistics and industrial are obviously thriving in the current environment, whereas retail, food and beverages, hotel and some residential developments – as I touched on before – they’re the ones that have fared the worst because of their reliance on the consumer, and the stability of economic conditions.
I would add, though, that despite many assets being covered by the ones that are performing poorly, just because they fall into that asset sector class doesn’t mean that they’re distressed. Lenders and their borrowers who are well-stabilised and relatively low-leverage against the assets – they’re all typically fairly secure, and those are able to pursue alternative strategies and options with those particular assets will fare well from this.
WM: What has been the stance of lenders to date when it comes to nonperforming loans? How long are they likely to show leniency?
MN: I would say typically lenders have been providing support and they want to be perceived as providing support. I think in terms of being able to progress enforcement, they’re holding off from doing so at the moment because of various regulations and also the risk of the negative PR and press criticisms that we saw in the aftermath of 2007.
I’d say as a whole, lenders have been pretty supportive. A lot of restrictions are going to be lifted come end of October, and I think that’s when we’ll really see how much stress is in particular lenders portfolios and we’ll start to see a lot of them taking a more proactive approach when it comes to dealing with that.
WM: What is the appetite for lenders to take on ownership of distressed assets? Will this be a source of stock to the market?
MN: Lenders normally don’t want to enforce, in most instances they won’t take the ownership on themselves, they’ll typically use a recovery mechanism, whether that be a receiver or an insolvency process, but, they don’t want that. Lenders are in the business of lending and having a performing cycle from the start of the loan until the end of the term. Therefore, anything that does deviate away from that isn’t really desirable for them, therefore lenders will be working very hard with their borrowers, providing there are open lines of communication there, to stabilise the loan performance over the period of that loan.
So, very different to 2007, but typically lenders will try to make their loans perform and be stabilised. There is no doubt though that there will be a lot of stock brought to market by loans that have failed to perform and where enforcement action has been taken. We’re starting to see quite a significant increase in contact from lenders who do have concerns, so there is no doubt that there will be a market that will effectively be dominated by that restructuring angle.
WM: What are the key things to watch for in H2 and into 2021?
MN: I think we’re still a little bit further out than that. I’d say H2 will be watching to see if there are enforcement actions taking place and if the government regulations allow that. 2021 I think will be the opening of the market, where there will be a lot of opportunities for the debt funds and private capital who effectively enter into an investment market at the bottom with the hope that future market conditions will begin to flourish and over a long-term period, the value of those assets will come good. So, I think 2021 will be the start of an investment market with a bit more buoyancy.
Will Matthews
Head of UK Commercial Research
Marc Nardini
Partner, Restructuring & Recovery