According to Philip Moore, head of European real estate debt at Ares Management Corporation, the £300 million (€347 million) lending deal closed by the firm this month is indicative of the type of financing opportunity the market will generate in the coming few years.
Last week, the Los Angeles-headquartered investment firm announced its largest deal since it launched its London-based real estate credit platform in January 2022. The refinancing was also one of the largest in the UK market so far this year.
The senior loan was provided to refinance two assets – fashion brand Burberry’s store at 21-23 New Bond Street, on one of London’s most exclusive shopping drags, and the 601-room, four-star Hilton London Kensington hotel. Ares did not confirm the identity of the sponsor, which was advised by property consultancy JLL. However, it is understood Cola Holdings, the landlord founded by Iraq-born businessman Bakir Cola, and now run by his son Azad Cola, owns both assets. The company announced the purchase of the Kensington hotel in October 2018 for more than £260 million.
The completion of the financing brings Ares’ European loan book to £1.1 billion. Moore expects upcoming refinancing mandates to create further scope to grow its loan portfolio. “We believe this year will be busier than last year because of the pullback from banks, and this deal is a good example of the type of opportunity we are seeing.”
The size of the financing was pivotal to Ares winning the mandate, he believes. “If you look at what the clearing banks are doing today, they are typically focussed on cheques of up to £75 million. To get enough of them together to do this type of deal is challenging.
“The other pressure [for banks] is on the interest coverage ratio. These are prime London assets with long leases and historically low cap rates. On the other hand, base rates are in the 4-5 percent range, so interest coverage becomes challenging. Banks need to hit certain ICRs and that is why they have gone from doing 60 percent loan-to-value to 50 percent.”
Moore recognises the deal is one which would have suited bank lenders in less volatile market conditions. However, he said alternative lender competition for the transaction was also limited. “Once a deal is above a couple of hundred million pounds, it becomes a more limited lender field,” he explained. “Also, this was agreed earlier in the year, when there is uncertainty over peoples’ budgets. Alternative lenders also have available capital at different points in any given year, due to the funding bases of such lenders.”
The financing process was initially launched not long after the UK’s disastrous September 2022 ‘mini budget’ under then Prime Minister Liz Truss’s leadership.
Moore explained sponsors across the market are giving plenty of consideration to structuring loans around ICRs in the current market. “What we are seeing, in some cases is sponsors either buying down interest rate swaps, or they are buying in-the-money caps to make deals work, which is essentially a form of equity injection.”
The financing required separate underwriting processes for each asset. The Burberry store fit into Ares’ view on well-performing retail, Moore explained. “We believe that several of the sub-sectors with the best fundamentals are super-luxury and outlet centres. In the super-prime category, it is hard to think of a better location than this part of Bond Street, where big brands have congregated.”
Financing low-yielding assets can make sense, despite rising debt costs, he explained. “This is not as straightforward as if it were low-yielding logistics. There are still all-equity buyers for this type of asset as well as brands buying their own stores, so they have different funding constraints than your typical logistics buyer. For example, they may use corporate funding, so the link between interest rates and cap rates is not as strong.”
Loan maturities in the coming years will enable alternative lenders like Ares to refinance assets previously funded by banks, Moore believes. “The refinancing wall is real. This time around, extend-and-pretend is challenging for banks because every time there is a maturity, interest rate hedging rolls off and needs to be replaced, and that is expensive so puts huge pressure on ICR.
“Also, banks are better capitalised than last cycle, so they are more able to force an outcome if they need to push for a disposal.”
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