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Why borrowers are going long in debt deals

The prospect of rising interest rates and the proliferation of buy-to-hold strategies are among the drivers of long-term loan deals.

Although some of the insurance company lenders in the European commercial real estate lending market have expanded their loan repertoire to include bank-style shorter-dated loans, market participants note an increase in demand for the longer-term financing deals insurance lenders are typically known for.

A growing number of borrowers are aiming to lock in debt beyond the five-year time frame seen across much of the market. US insurer AIG, for instance, has seen an increase in fixed-rate lending to more than $1 billion across Europe this year, says Tom Fewings, global head of CRE finance.

Gregor Bamert, Aviva Investors’ head of real estate finance, notes “strong interest” from borrowers in longer-dated financing. “Longer-term rates have remained very low by historic standards – by way of example the entire Gilt curve, even out to 30-plus years, is currently at a sub-2 percent rate,” Bamert explains. “This provides the opportunity for borrowers with a long-term orientation to secure very attractive rates.”

In a recent deal, Aviva wrote a £233.7 million (€263.3 million) refinancing for MedicX, the healthcare REIT investing in the UK and Ireland. The refinancing increased borrowing by £30.8 million, with an annual fixed rate of 3.05 percent over 10 years. “The pricing available in the current relatively low-interest-rate environment gives MedicX certainty over its cash flows over the long term and future-proofs its financing against refinancing and interest rates risks over the next 10 years,” a spokesman for the REIT told Real Estate Capital.

Interest rates remain at rock-bottom levels, at 0.75 percent in the UK and 0 percent in Europe, which compares with rates of 5.5 percent and 4 percent seen at the end of 2007, respectively. However, with rate rises in Europe in the coming years a prospect, some investors with long-term strategies are locking in debt.

Some borrowers in the UK are already getting to grips with the prospect of rising rates, a possibility if the Bank of England needed to curb inflation in a no-deal Brexit scenario, as Mark Carney the Bank’s governor, suggested in mid-September.

In July, UK-focused Schroder Real Estate Investment Trust, announced the refinancing of debt to lock in reduced loan pricing ahead of potential interest rate increases. The firm refinanced a £25.9 million portion of its £129.6 million loan with Canada Life, reducing the fixed-interest rate cost from 4.77 percent to 3.09 percent. The REIT also increased a revolving credit facility with Royal Bank of Scotland from £20.5 million to £32.5 million, securing a margin of 1.6 percent.

“These transactions capitalise on current low interest rates and reposition the balance sheet for a lower cost and longer term,” Schroder REIT said at the time.

In the UK, JCRA has noticed a “significant increase” in refinancing activity over the past 12 months, with one of the key drivers being a rising concern about rising interest rates, the debt advisory and hedging specialist said in a recent report. “Our clients have either extended their existing debt and hedging, or taken out fixed-rate longer-term institutional debt,” JCRA said.

Across Europe, Allianz Real Estate has also seen “increasing demand” for fixed, longer-dated debt from borrowers with buy-and-hold business plans for prime assets, notes Roland Fuchs, the insurer’s head of European real estate finance. To illustrate this, Fuchs highlights the circa €300 million, 15-year loan to German pension fund BVK to support the acquisition of the building that will house Apple’s flagship store on Paris’s Champs-Elysées.

Property investors such as REITS or family offices, aiming to secure long-term cash flows from property, are the typical borrowers demanding fixed, long-term debt, says Marco Rampin, head of Continental European debt and structured finance at CBRE.

Rampin argues the higher availability of longer-term capital from non-bank, insurance lenders, is creating the environment for such deals: “These lenders are often funded by institutional investors with long-term liabilities, so there’s money available to deploy for the longer term,” he says.

While supply of longer-term debt products grows, borrowers’ anticipation of changing market conditions is fuelling demand.