London-based debt fund manager DRC Savills Investment Management has agreed a €30 million (£26 million) loan facility for a portfolio of Barcelona residential assets, funding the financing with the expectation that the transaction’s debt yield will rise as the sponsor completes renovations
The refinancing and capex loan on the 300-bed portfolio replaced debt originated by Spanish banks. The portfolio also includes ancillary retail owned and operated by Node, the alternative residential asset manager, founded by ex-Blackstone executive, Anil Khera.
The loan has a relatively low initial debt yield; a ratio that is increasingly being adopted by lenders in the current market due to its focus on asset-level income, and is used in conjunction with other risk ratios such as LTV.
But the lender forecasts that the debt yield will increase, given the expectation that Node will be able to improve income via capital expenditures.
“DRC SIM’s confidence in the income profile was largely due to the robustness of the business plan and, of course, the outstanding track record of the team on the ground,” said Richard Herring, co-founder of Westfort Advisors, which advised Node on the loan. “As expected, tightening monetary policy has generally placed a greater emphasis on debt serviceability, as well as the quality of the product and the capability of the management team.”
Khera, who helped build Blackstone’s student housing platform Nido Student Living during his 11-year stint at the manager, said lenders are also “very keen” on the loan’s interest ratio coverage and wanted to know that the “rental income is going to cover the loan” in the current economic climate.
“This is a business plan with some element of return-on-investment capex spend to bring part of the portfolio up to Node’s global standard, which achieves market rental premiums. This means there will be an increase in income and value over time, which lenders will benefit from,” Khera said.
Westfort is seeing lenders across the market “trying to show flexibility” with respect to client hedging strategies “given the eye-watering increase in costs”.
“With this deal in particular, we were keen to be creative around the use of caps and came to a sensible agreement with DRC SIM,” Herring added.
The opportunity to finance the portfolio received competitive interest from domestic Spanish banks as well as alternative debt providers. This is due in part to expected market rental growth over the course of the business plan, said Node’s Head of Iberia, Esteve Almirall.
“Spain’s urban residential rental market is outperforming rental growth in the wider residential market, with nearly 10 percent rental growth in the last year in Barcelona,” he said.
Owner-occupied housing as a proportion of the total housing stock in Spain’s major cities is significant, according to data from Aquila. It estimates that only 30 percent of Barcelona’s residential market is available for rent, it reported in a July research paper, and identifies a national demand for rental housing of around 2.5 million households.
“Spain’s urban residential rental market is outperforming rental growth in the wider residential market, with nearly 10 percent rental growth in the last year in Barcelona”, Almirall said.
He added: “This is a business plan with some element of return-on-investment capex spend to bring part of the portfolio up to Node’s global standard, which achieves market rental premiums. This means there will be an increase in income and value over time, which lenders will benefit from,” he added.
Node, which was launched in 2016, co-owns and asset manages Spanish developments comprising more than 3,000 beds in Madrid, Barcelona and Bilbao, with an additional 2,000 bed pipeline identified in Spain.
It focuses on providing design-led urban rental communities that include a high proportion of shared spaces – such as co-working facilities, residents’ lounges and wellness centres – and are aimed at young professionals.
Node’s properties target young professionals earning an annual salary of between €25,000 to €70,000. “This demographic is likely to get above-inflation pay rises, and due to the inflationary situation, we are able to keep pushing rental growth through,” Almirall explained.