October has been a busy month, filled with insightful travels and discussions. I had the opportunity to visit Athens, London, and Bucharest to talk about the significant role that digitalization is playing in transforming real estate-related processes. A substantial push for automation is coming from both consumer demands and the regulatory requirements of banking and insurance companies.
Banking Regulations and Digitalization
Banks have been under stringent regulatory scrutiny over the past decade, leading to the need for comprehensive data, reporting processes, and submissions to regulators. In addition to these existing regulations, banks are now facing climate change stress tests, which require detailed information about the environmental risks to which their collateral is exposed. In many Western and Northern European countries, the digitalization of real estate processes has progressed significantly. Banks have created digital profiles for collateral, automated underwriting procedures, and automated valuations, thereby streamlining reporting processes to risk and compliance departments.
Leveraging Digitalization for Growth
Some companies are also leveraging the data obtained from these processes to attract new clients and cross-sell bank assurance products. Examples of this include identifying properties exposed to specific risks and offering tailored insurance products, or recognizing energy-inefficient properties and proposing green loans to facilitate improvements. Ask Wire has developed an Automated Valuation Model (AVM) for a systemic bank in Cyprus and is currently engaged in developing a proactive marketing framework for financial organizations in Greece.
The insurance sector has also felt the impacts of climate risk, as evidenced by the numerous fires that have ravaged the Mediterranean region and the recent catastrophic events in Greece. Regulatory bodies, such as the European Insurance and Occupational Pensions Authority (EIOPA), which develops guidelines and standards to ensure consistent implementation of the Solvency II requirements across the European Union, have imposed significant requirements on insurance companies, calling for improved risk assessments and management of underlying properties. In response, insurance companies are working to standardize their processes and improve building risk assessments. Ask Wire is actively working with a number of insurance companies in Greece to establish a robust risk assessment framework.
Pace of Adoption Varies Across Europe
While these trends are common across Cyprus, Greece, Romania, and the UK, the pace at which they are being adopted varies significantly. In the UK, these practices are well-established and considered the norm. In Greece, some organizations are well underway in implementing these changes, while others are still in the discussion phase. In Romania and Cyprus, the adoption of these practices is lagging behind. However, the speed of adoption is likely to increase, as the economy has been slowing down and financial institutions will look at ways to improve efficiencies, a euphemism for cutting costs, in order to maintain their margins.
Real Estate Market in a Downward Trend
We can expect shifts in the real estate market due to the current downturn in the European and particularly the commercial real estate market. Rising interest rates have diminished the appeal of property investment, given the more lucrative alternatives like bonds or dividend-bearing companies. Additionally, the refinancing of existing loans taken out when base rates were near 0% will render investments made three to four years ago unviable. The generated revenue from commercial properties is insufficient to cover the loan repayments, leading to the collapse of substantial investments backed by commercial real estate. The collateral for these loans is alredy being returned to the banks, with various “structured deals” already reported in the press where the investors are handing back the keys (giving the collateral) to the financing organisations.
The UK Property Fund Dilemma
In the UK, specifically, open-ended property funds are struggling to fulfil investor redemptions, with some even preventing investors from withdrawing their funds. This practice is known as “raising the gates” and it happens when there is a surge of redemption requests and the fund doesn’t have enough liquid assets to meet these requests.
This action, while protective of the fund’s integrity, can be frustrating for investors who wish to access their money. Moreover, when investors redeem their investment and the fund has to liquidate assets quickly, it increases the risk profile of the underlying investment. This is because the fund manager is forced to sell the fund’s most liquid assets, leaving the remaining investors with the higher risk, more illiquid properties.
I look forward to discussing these themes further and exploring the best ways we can navigate these changes together.