First, what is the status of ING’s lending activity in Iberia in 2022? And what are the main goals set for 2023, both in Portugal and Spain, in terms of asset classes?
Like 2021, 2022 was an excellent year for ING Spain & Portugal with a gross production of around €650 million. In terms of country allocation, Portugal represented approximately 40% of total production for the year. During these last two years, the team has been engaged in large underwritings. In 2021 we closed the largest underwriting in the logistics segment with about €425 million. In this transaction, ING Spain & Portugal was the sole book-runner, MLA and hedge provider, and was successfully syndicated in a month’s time. In 2022 we revalidated the feat with one of the largest transactions of the year in the PRS segment (Private Rented Sector). This time ING Spain & Portugal underwrote €291 million and took the role of sole book-runner, MLA and hedge provider. For 2023, the strategy remains similar. With respect to asset classes, we are mainly focused on logistics and PRS in Spain, and offices in Portugal.
Looking into the most recent financing operations completed in Iberia, are there any that you would like to highlight?
To date in 2023, we have closed around €125 million in Portugal in two transactions we consider milestones for ING Spain & Portugal, and which further underpin our strong commitment to the Portuguese Real Estate Market: (i) an underwriting over a relevant transaction of food retail in Portugal, where we acted again as soleMLA, book-runner and sole hedge provider. Once again, we proved our underwriting capabilities by successfully syndicating part of this transaction to a local Portuguese bank; (ii) we closed our first logistics transaction in Portugal with an institutional investor, a key international client for ING. The asset was a brand-new logistics platform with strong ESG credentials.
Another milestone is the recent change in our internal financing policy, which has now allowed us to perform Development Finance in Iberia. Following this big change, we are currently building a healthy pipeline and, once closed, working on our first development finance to one of the best-in-class developers in Iberia, on a strategic logistics asset for a blue-chip tenant in the Lisbon area.
After the pandemic, and most recently against the inflationary backdrop, how do you see the real estate debt quality within the Iberian markets? Do you foresee a sharp rise in NPL in the short term?
In general terms, we banks are in a stronger position when compared to the previous Global Financial Crisis. Strong credit discipline and strict loan granting processes, especially in the core market, make us believe that no cash-flow crisis should be expected. However, the rising interest rate environment and yield compression will entail market value adjustments that might bring about temporary (soft) LTV covenant breaches, although the values should start to stabilise with improved market conditions. In the current situation, we do not anticipate any NPL in the short term.
What key trends do you see in the real estate financing sector in the current economic climate? And what are your expectations for the future?
The negative interest environment and attractive returns have been a catalyst for both strong equity investments and bank financing during these last years in the real estate sector. However, rising interest rates and uncertainties concerning how these will evolve, as well as the central banks’ strategies to curb inflation, have temporarily brought investment volumes down to around 50% of the previous years. Banks still have an appetite to finance real estate, although services are provided on a more selective basis, applying a higher margin since the Summer of 2022. All in all, banks grant financing primarily to (prospective) key clients on assets that tick all the boxes, including ESG credentials.
2022 marked the turning point in the low inte- rest rate market, and now it is hard to predict when rates will reach their peak. Given this reality, how is capital moving towards different investment classes?
In general, there is investor appetite for new investments, although decision-making remains cautious while we await a more favourable and stable economic environment and less volatile market values. Though I believe yields have been adjusted, or are on the verge of adjusting, in some instances we see that prices have yet to do so. Given this situation, only smaller sized deals are currently being closed in Spain and Portugal. Nevertheless, we anticipate larger transactions will occur in the coming six to twelve months, as well as improvements in the overall market conditions some months there- after. Recently released reports depict Spain’s positive outlook with sustainable recovery in tourism, controlled inflationary environment and GDP growth. Notwithstanding, in an inflationary and rising interest rate environment, the decision to buy today is being carefully considered, as undertaking any purchase now can turn out to be a bad decision in three months’ time.
And how do you predict the real estate investment market will evolve in Iberia over the next months against this rising interest rate scenario?
However timidly, the equity side has started to view market level deals and, when the right opportunity is found, to buy even at a discount. Looking at the evolution of the Iberian market, my personal view on the upcoming investment flow is as follows (per asset class):
(i) Residential: due to the low returns in a high interest rate environment, investment decisions in PRS become challenging, whereas BTR (Build-to-Rent) becomes a more attractive investment product. A good example is the many voices advocating the importance of BTR to tackle Portugal’s affordable housing shortage, one of the big issues the country is currently facing.
(ii) Logistics: the logistics market has grown rapidly with the expansion of e-commerce, featuring major investment volumes that eventually drove yields downwards. Market adjustments are ongoing and, therefore, we anticipate yield cor- rections in core assets in the upcoming periods.
(iii) Offices: the introduction of remote working has further broadened the gap between prime and secondary offices. Prime offices with robust ESG credentials will be the winners, while challenging performance is expected in secondary office locations.
(iv) Retail: retail was already polarised before Covid-19 due to fears concerning the expansion of e-commerce. At present, e-commerce pen- etration in both Spain and Portugal is at levels similar to other European countries, whereas the performance of prime shopping centres in Spain & Portugal is already exceeding pre-Covid-19 figures and at double digits, underpinning my view that the risk/return in prime shopping centres is unjustly penalised. It is, therefore, about time that investment and financing return to this asset class.
Sustainability is an increasingly mandatory topic within the financing world, but also in the EU’s real estate sector. What does sustainable finance mean now for the Iberian real estate sector in terms of implementation?
ESG is causing a major shift in how we understand finance today. Sustainable Finance is not new to ING Spain & Portugal, it is in our DNA. As pioneers with strong ESG commitments, we granted our firsts Sustainable Linked Loans in Spain in 2019. Throughout 2022, over 80% of our financings were Sustainable linked, Green or with green factors. This is evidence that the sector is becoming increasingly aware of the importance of ESG, and is starting to take action to meet the Paris agreement of net-zero by 2050 or sooner.
Looking at the Iberian market, how are you following the movements from large owners in order to improve asset quality in terms of ESG compliance? Are you already working together with some players in this area?
Our main clients are institutional investors with integrated ESG departments, and sustainability is now being factored into their strategies and business decisions. The increasing awareness and commitments of these organisations to meet net zero carbon by 2050 or sooner show that ESG compliance is no longer a nice to have, but a must have.