Spring Conference 2017

CREFC Europe Spring Conference

Thank you to the speakers, sponsors and delegates who joined us on Thursday 11 May.

This was another successful, well attended event – 170 joined us throughout the day.  Enjoying the closing reception in the sunshine on the rooftop of Madison we were delighted that over 120 people made the most of the networking opportunity.

Read all about it here:-



Take a look at the programme that was delivered here


CREFC Europe Press Release

The commercial real estate finance industry will consider the implications of the Tories, Trump and the French election results along with a range of other topics next week at the CREFC Europe spring conference.

Read the full Press Release here 

Discounted Price – Limited number of Commercial Mortgage Loans and CMBS books for sale

A new edition of Commercial Mortgage Loans and CMBS was launched at CREFC Europe’s Autumn Conference. The book, titled ‘Developments in the European market’ is an essential guide to those in the CRE and CMBS industry.

It gives detailed coverage of existing CRE lending and CMBS markets post-financial crisis and Brexit, the legal and regulatory environment and the restructuring of existing deals and transactions.

We have a limited number of copies available to purchase at a discounted price of £75 (RRP £195). Please contact Rachel here if you would like to purchase a copy.

View the highlights from our Autumn Conference 2016

The largest CRE debt Conference in Europe attracted over 400+ delegates over two days and provided a platform for commercial real estate (CRE) finance market participants to come together to learn about and discuss the latest trends and challenges facing the industry.

You can view the highlights from our Autumn Conference here 

CRE Debt in the European Economy 2016

CRE Debt in the European Economy 2016

Since the global financial crisis, there has been an understandable focus in Europe and beyond on the risks that CRE debt can present for financial stability.  Indeed, CREFC Europe has supported initiatives such as A Vision for Real Estate Finance in the UK that seeks to help policymakers approach our sector in a more strategic, holistic and informed way.

What has been missing is a broader recognition that debt has a vitally important role to play in supporting investment in the real economy and the built environment.  Without a sensible supply of reasonably priced credit for the CRE industry, Europe’s towns and cities would be unrecognisable, and the availability and cost of premises would be much higher for ordinary businesses.  In recent years, we have also seen an explosion of interest in CRE debt as an investable asset class in its own right, albeit one with low levels of transparency outside the traditional, but much diminished, CMBS space.
Alongside three other industry organisations, the APL, INREV and ZIA, we have commissioned a major research report that seeks, for the first time, to describe the role that debt plays in the European CRE economy and for investors.  We aim to use it to educate European policymakers and others about our sector, and encourage our members to make use of it too.

Brexit views

Collaborating with our colleagues across the pond, CREFC Europe members and staff provided the content for an impromptu CRE Finance Council conference call on the political, economic, legal and commercial landscape following the outcome of the UK’s EU referendum.  Andrew Petersen of K&L Gates, Mark Battistoni of Chatham Financial and Peter Cosmetatos discussed the issues and responded to questions from more than 200 participants on the call.  The audio recording is available here.

WSJ – Negative Rates May Cost Property Investors More

Negative interest rates have real-estate investors facing a counterintuitive quirk: their borrowing costs can actually rise as interest rates fall.

This is a mounting concern for many property investors given the potential for rates to decline further as central bankers try to spur economic growth, according to lobby group CREFC Europe.

View article here.


Summary of key policy points on qualifying securitisation and CMBS

Sustainable and responsible securitisation markets have an important role to play in the commercial real estate (CRE) debt market, as they do in other parts of the financial system. Unfortunately, the criteria that international regulatory bodies have been developing to encourage simple and transparent securitisation ignore key aspects of the CRE debt market. As a result, an important opportunity to improve the resilience and diversity of CRE debt markets is likely to be missed. Click here to view the key points.

Negative rates causing headaches and increased costs for property investors says CREFC Europe

Thursday 14 April 2016

Negative rates causing headaches and increased costs for property investors says CREFC Europe

  • CREFC Europe warns negative rates can cause potential mismatches between loans and associated interest rate hedging
  • For new deals, an interest rate floor in the loan should be matched by an interest rate floor in any associated swap – which will cost extra in the current environment
  • For old deals, borrowers should audit loan agreements and associated swaps to identify cases where an interest rate floor in the loan is not matched by an interest rate floor in the swap

Negative interest rates are driving up the costs of real estate lending, property chiefs have warned.

There has been widespread criticism of the European Central Bank (ECB) reducing interest rates. Moody’s warned last month of “potentially adverse effects on final stability” in Sweden. Similar reports around a housing bubble in Denmark have been  echoed by Larry Fink, chief executive of BlackRock.

At a Commercial Real Estate Finance Council (CREFC) Europe seminar in London last night, experts warned that commercial property investors face new considerations and costs on new deals, and potential problems in historic deals. This is because specific provision needs to be made, and the associated cost paid, to include an interest rate floor in an interest rate swap. While that has become a sensible precaution in the current interest environment, it certainly wasn’t routine a few years ago.

With the potential for rates to decline further (see note 2 below), this will be a concern to many.

The problem of hedging interest rates

In effect, and at a cost, interest rate swaps allow a borrower to convert a flexible floating-rate loan into a fixed-rate liability that its rental income is expected to cover.

While loan agreements can include a safety net so that floating interest rates stop at zero (to prevent lenders having to pay borrowers), many older interest rate hedging derivatives don’t do that; a typical interest rate swap would not cater for this unless an interest floor is explicitly included in the contract.

“Derivatives play a crucial role in financing by allowing borrowers and lenders to hedge risk, for instance related to interest rates. The problem is that derivatives may not be set up to deal properly with negative rates,” said Adam Dann, partner at Berwin Leighton Paisner, a law firm.

Rules set down by the International Swaps and Derivatives Association (ISDA), which is responsible for standardised derivatives agreements, govern how swaps are structured. A “plain vanilla” interest rate swap would not (and should not) include an interest rate floor, but the position is different when a swap is used to hedge interest rate risk in a loan that does include such a floor.  See the example in note 1 below for an illustration of the problem that can arise.

“A mismatch occurs when borrowers wish to hedge the loan with an embedded floor using a conventional interest rate swap,” said Nadim Mezher, a director in global banking and markets at HSBC.

“This is because the floating leg of an interest rate swap does not include a zero percent LIBOR floor, thus exposing the borrower to an increase in the combined financing cost should LIBOR turn negative, in the absence of a zero percent floor in the hedge,” he added.

While including an interest rate floor in an interest rate swap is straightforward, pricing it can be challenging.  Mark Battistoni, managing director at Chatham Financial, the world’s largest independent interest rate and foreign exchange risk management advisor, believes parts of the derivatives markets have had a very hard time adapting to negative rates.

“Models need to be revised or scrapped in favour of new ones – in particular for interest rate options such as caps and floors,” he said. “The pace of change varies by banks, so even now, the product capabilities and price differential between mainstream banks for some hedging products is shockingly wide.”

The problem for loan agreements

In the lending context, the problem posed by negative rates is clear: if the reference rate in a floating rate loan falls below zero, the lender won’t receive the full margin for which it bargained. And if the reference rate moves far enough into negative territory, the lender could, in theory, end up having to pay the borrower interest.

The obvious solution is for the loan agreement to include a zero floor for the interest rate payable, so that the lender never has to pay interest to the borrower. The Loan Markets Association (LMA), which maintains standard form documentation for the loan syndication market, is understood to have recommended the inclusion of such a provision.  But not all transactions are documented using LMA documentation, and older deals may not include a zero floor.

“In some sectors – like the leveraged corporate space which is dominated by institutional debt providers – LIBOR floors have been prevalent at levels above zero for a number of years,” said HSBC’s Nadim Mezher.

“Now that negative interest rates have become a reality in some currencies and a possibility in others, many lenders are requiring zero percent LIBOR floors on loans. This is required to protect lenders’ loan margins as some central banks have begun charging banks for excess reserves in markets where policy rates are negative, while banks in general have yet to pass on this cost to their retail and corporate clients,” added Mezher.

Peter Cosmetatos, chief executive of CREFC Europe, said: “There are numerous unintended consequences arising from negative rates.  One issue, historically as well as for new deals, is ensuring that both loan agreements and related hedging arrangements all work and fit together as they should.  Addressing risks in that area is likely to carry a cost.

“More broadly, our sense is that, while most lenders remain disciplined and responsible, the monetary policy environment is creating perverse drivers and unintended risks in cyclical real estate markets. Crucially, real estate investment has a key role to play in economic recovery across the world. And while only five central banks currently have negative rates, their jurisdictions account for almost a quarter of global GDP, and the international nature of real estate capital flows means that knock-on effects will impact in many markets.”


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