Emerging Trends in Real Estate® Europe 2006 - Urban Land Institute

c h a p t e r 2
There is thwarted
capital hunting everywhere.
Capital Markets
The one thing Europe’s real estate investment markets
are not short of is capital. “If you have an asset with
an income stream to sell, there are 50 people queuing
up to take it off you.” In most markets, the ample funding of
a few years ago has given way to surfeit. Indeed, the excess of
capital given the shortage of investment stock is seen as one
of the most serious problems facing investors over the coming
year. Nearly 56 percent of those surveyed think that capital
will be either moderately or substantially oversupplied in
2006 and the availability of both debt and equity capital will
continue to increase relative to last year.
However, a significant minority—nearly 29 percent—
think that capital will be moderately or substantially undersupplied
during the same period. This result appears to be
contradictory, but it is not. Capital shortage is the stark reality
for small- to medium-sized developers who depend on
debt finance. There is now little appetite for lending to developers
unless they have a prelet or presold project because the
capital requirement to back lending for speculative development
is so onerous under the rules for Basel II.
The European Parliament approved the Capital Requirements
Directive—the law that makes the Basel II bank capital
adequacy rules obligatory throughout the E.U.—in September
2005. Thus, those banks that are planning to use the
“Foundation Internal Ratings Based” (IRB) approach under
Exhibit 2-1
Real Estate Capital Market Balance
Prospects for 2006
20.4% Moderately
Undersupplied
8.2% Substantially Undersupplied
15.6% In Balance 38.8% Moderately
Oversupplied
Source: Emerging Trends in Real Estate Europe 2006 survey.
17% Substantially Oversupplied
the new rules are now doing a final year of “parallel running”
of systems before the full move to Basel II at the end of 2006.
Those banks that have elected to use the more sophisticated
“Advanced IRB” approach will do parallel running until the
end of 2007. Regardless of which system banks have chosen,
speculative development lending is now very costly in terms
of the capital that needs to be committed, and the Basel II
Emerging Trends in Real Estate ® Europe 2006 15