Even though the covid-19 pandemic kept Real Estate Capital physically distanced from the European real estate finance industry in 2020, technology enabled us to keep interviewing senior figures ‘face-to-face’ throughout this tumultuous year.
Here are abridged versions of some of this year’s interviews. More interview highlights will follow on 24 December and 28 December.
Emma Huepfl and Marco Rampin, CBRE Global Investors
In January, before the pandemic hit Europe, we met with Emma Huepfl, managing director of debt investments, and Marco Rampin, head of debt strategies Europe, at manager CBRE Global Investors to find out about their European lending plans. We asked them about headwinds. Their answers provide insight into how lenders viewed the market, pre-pandemic. Read the full interview here.
Although Huepfl and Rampin agree the outlook for Europe’s real estate financing markets is generally stable, they say they are conscious of potential headwinds.
“Overall, there is relatively moderate economic growth and that is not helping any investment case, so we need to be wary of that,” says Rampin. He also has an eye on political ructions which, he says, can cause hesitancy among investors, particularly those with a more prudent outlook.
But perhaps the more seismic change is the shift in how buildings are being used: occupiers’ demands, changes in the labour market and the transformation of consumer habits all affect the investment case – and alter how companies, like CBREGI’s lending business, go about underwriting their assets.
A decade ago, the main measure of underwriting was predictability of cashflow, Huepfl explains. But the landscape has changed: “Our key underwriting question now is, does this sponsor have the capability to make sure that asset is going to be relevant to its location during the life of the loan, and will the loan maintain its value at exit?”
That means an acceptance that a property might not be fully leased for the duration of the loan, but being confident the sponsor will deliver its business plan.
“We start with the equity case and get to know that inside out,” Huepfl says. “We take a partnership approach: this is your equity case, and we have a base case on the debt side which will be carefully managed and covenanted to protect it. If the financing is well structured, it helps the borrower grow the value of the asset during the lifetime of the loan.”
In unproven markets, such as co-working, this could prove more difficult, she accepts. The company is unlikely to take on a borrower with no experience in a particular asset type or put its money into emerging locations with little track record.
Huepfl and Rampin are clear that the business is not there to “refinance problem loans” – which means steering clear of most UK retail properties unless the sponsor has a compelling change-of-use proposition or something similar.
“The same would apply to continental Europe,” Rampin says. “Of course, the crisis in retail is less pronounced than in the UK, but again there is ongoing structural change which could affect every other country too.”
Another key factor to consider, both agree, is clients’ increasing concern with environmental, social and governance-conscious investing. Occupiers want a building with a lower carbon footprint, and investors want to allocate capital responsibly.
Getting on board with the agenda as a lender is increasingly important, Huepfl insists: “It will go to value if a two-tier market develops between assets that are very poor in their sustainability rating and those that satisfy what the occupier and the ultimate investor is now looking for. That absolutely needs to be part of the underwriting.”
In increasingly complex real estate markets, factors such as sustainability and shifting patterns of occupier demand are now as much a concern for lenders as for equity investors. For lenders such as CBREGI’s new debt team, the challenge is to match growing demand from sophisticated investors with the finance that borrowers need today, and in the future.
How is covid-19 affecting debt liquidity?
Early feedback from banks is they need to absorb the shock of covid-19, but they are sticking with deals already underway. However, lenders are reluctant to consider new financing. There is some pricing revision, but banks are insisting they will be there for their existing clients. Some foreign banks are prioritising domestic clients. Decision-making is also taking longer, because people aren’t at their desks. Hence, the assessment of a deal takes longer.
So far, I don’t see this as a risk. We approached our banks to reassure them about our position. We have said where our developments might run over by a couple of months, for example, but we have kept our lenders informed about our tenants’ and investors’ commitments. Communication is key.
Will lenders be more cautious?
That always happens after a crisis. Most banks we talk to have done a lot of homework since the last crisis and have stuck to the type of business they are most comfortable with. However, there will be stress in loans to some asset classes. I don’t expect an absolute stop from organisations on the lending side but checks and balances will have more emphasis now.
The market always tends to deliver finance for most assets, but borrowers need to pay more for it in some cases. Some lenders will become troubleshooters, especially in cases where new finance is needed. We are seeing some non-bank lenders increasing activity. In a crisis, there are always some who benefit. This could be an opportunity for non-bank lenders with appetites for higher risk to win more business.
Do you expect your borrowings to come under pressure?
We are closely observing our portfolio and don’t currently see any instances where we need to speak to our banks about covenant breaches. Ultimately, it depends on how long this situation lasts. We analyse our LTVs and other financial covenants on a regular basis. We have a good IT system to monitor them, so we don’t suddenly need to start reading all our loan documentation.
Nick Sanderson, Great Portland Estates
In July, we spoke to Nick Sanderson, finance director at Great Portland Estates, on how the London landlord was coping with the covid-19 crisis. The full interview can be found here.
The finance director of Great Portland Estates has told Real Estate Capital that the West End of London landlord recently sought a covenant waiver on its only secured loan to provide “flexibility and breathing space” as it deals with disruption in rent collection across its retail and hospitality holdings.
Nick Sanderson adds that low leverage across the group’s mainly unsecured borrowings, reflecting overall group-level gearing of 16.9 percent, means GPE is operating with substantial headroom above its debt covenants. “That’s a worry that we’ve taken from the table by maintaining low leverage,” he says.
However, in a 10 July trading update, GPE said that, on the back of the “ongoing cash flow challenges covid-19 is placing on the retail sector”, it had obtained an interest cover ratio covenant waiver on its only secured debt facility for the next two quarters.
GPE obtained the £40 million (€44.1 million) 10-year loan in 2012 from insurer Canada Life for Mount Royal, a retail and hotel property on Oxford Street, London. The facility was obtained on behalf of the Great Victoria Partnership, GPE’s joint venture with UK insurer Liverpool Victoria Friendly Society.
Its trading update revealed GPE received just 28 percent of June rents from its retail, hospitality and leisure properties, which account for 34 percent of its portfolio. The overall picture for rent collection was more positive, with GP collecting 69 percent of rent overall in June, down from the 82 percent of March rent now collected. Rental payments from its office properties, which comprise the bulk of its portfolio, held up relatively well, with 74 percent received.
Sanderson tells Real Estate Capital the decline in rent collected came as no surprise.
“In line with our expectations, the June rent collection is lower than it was in March because of lockdown’s impact on footfall as well as government policies regarding remote working and its moratorium on lease forfeiture.”
He adds there were a “few areas of disappointment,” such as the small number of occupiers which are in the “can’t pay, won’t pay” category: “These are well-capitalised retailers who have remained open but have made the blanket decision to not pay landlords across the market.”
As well as drawing down on deposits from occupiers to make up for the shortfalls in rent, GPE decided to approach its lender for support, Sanderson says.
“We’ve been transparent with Canada Life, which understand the challenges, including how the West End and Oxford Street is pretty quiet right now. They were comfortable to provide this waiver for the next two quarters, which gives us flexibility and breathing space as we work through the rent collection provision.”