1. Debt liquidity is back
The onset of the pandemic in Q1 2020 blindsided Europe’s real estate lenders and resulted in a tightened supply of finance across property markets.
In 2021, with a return of confidence in the investment market, lenders demonstrated an appetite to write loans again. The awards shortlists evidenced these transactions from a range of debt providers – including investment banks, commercial banks, debt fund managers and specialist lenders.
The US investment banks were at the larger end of the scale. Among them was the winner of one of the most coveted awards – Bank Lender of the Year: Europe – Citi. The bank’s 2021 deals included a €400 million financing of Crossbay, the urban logistics platform of manager MARK, in a multi-jurisdictional financing deal which backed the platform’s growth.
Although lenders were back in business last year, MARK chief executive Marcus Meijer told Real Estate Capital Europe in February 2021 that only a limited cohort of lenders entertained the idea of providing such a complex loan, hinting at continued lender caution. “There are surprisingly few banks that have the capability to do financing across multiple jurisdictions,” he said.
Outside the banking market, some of the year’s biggest deals were done by alternative lenders, including Starwood Capital, Apollo Global Management and Blackstone Real Estate Debt Strategies, demonstrating the scale and capability the leading non-bank lending platforms have reached. Those three lenders were behind the £1.8 billion (€2.1 billion) financing of Blackstone’s purchase of UK holiday company Bourne Leisure, which was voted Investment Financing Deal of the Year: Europe.
Speaking to Real Estate Capital Europe about the deal in May, Blackstone’s Gadi Jay, who is responsible for sourcing debt for the company’s European investment activities, said the firm went almost exclusively to debt funds and institutional investors in this case. “For the size, leverage and complexity of the debt, we needed to structure the financing as a hybrid corporate/real estate loan which debt funds such as Starwood and Apollo were comfortable with.”
The fundraising achievements shortlisted in the Fundraising of the Year: Europe award, which LaSalle Investment Management won, indicates the flow of capital into the market, increasing liquidity from alternative lenders. It shows no sign of abating. In affiliate title PERE’s Investor Perspectives 2022 study, 111 institutional investors were polled from August to September 2021 – 26 percent said they would invest more capital in real estate debt and 29 percent said they would invest the same amount in 2022.
2. ESG was top-of-mind
There is still a long way to go before sustainability is a routine consideration in real estate lending deals.
But the information gathered during the awards process showed several lenders are incorporating sustainable metrics into their loan deals, as the wider real estate industry gets to grips with tackling environmental, social and governance risk.
The transaction voted Sustainable Financing Deal of the Year: Europe was a prime example of a real estate financing in which expectations around the ongoing sustainability performance of the borrower is prioritised in the loan agreement. In the deal, French company Cronos – a joint venture between French insurers In’li and AXA Investment Management – agreed to an €800 million loan from a club of banks, which will be used to purchase residential assets in and around Paris which adhere to pre-agreed sustainability criteria.
In recent years, ESG has gone from being a topic to which many in the industry paid lip service to becoming the biggest consideration as real estate owners seek to future-proof their portfolios.
In a December guest piece for Real Estate Capital Europe, Lisa Attenborough, head of consultant Knight Frank’s London-based debt advisory business, commented: “Lenders are responding accordingly, applying margin discounts if ESG requirements are considered. In terms of borrowers, institutional funds are particularly active, but we also expect interest from overseas capital and private developers to intensify in the coming months and years. Given this momentum, the pressure is on lenders to ensure they are effectively meeting demand.”
One lender that demonstrated involvement in large-scale sustainable financing deals was the UK bank HSBC, crowned Sustainable Finance Provider of the Year: Europe. It was involved in financing deals including a €3 billion sustainability-linked credit facility for retail owner Unibail-Rodamco-Westfield in May 2021.
It was also a key player in arranging sustainable bond issues for real estate companies – a growing source of finance for European property owners. In August, for instance, it was global coordinator of a £400 million unsecured green bond for UK developer the Berkeley Group. Such deals demonstrate borrowers are willing to peg their group financing arrangements to their own ESG targets.
3. A real estate upgrade is underway, and lenders want to finance it
The covid pandemic has changed the conversation around what makes a sound real estate investment.
Equity investors are looking beyond the current income produced by an asset to consider whether the asset will meet changing patterns of consumer, occupier and investor demand in the coming years. ESG is a key part of this, but so too is a fundamental shift in how people use buildings.
“Broadly speaking, one of the outcomes of the pandemic is the acceleration of obsolescence, where things like wellbeing, energy efficiency and tech have been called into question in all aspects of commercial real estate,” Karim Habra, head of Europe and Asia-Pacific at Ivanhoé Cambridge, the real estate subsidiary of Canadian pension plan Caisse de dépôt et placement du Québec, told affiliate title PERE in December.
“We’ve seen assets that were built just a few years ago already deemed outdated, and those assets remain expensive because they still look brand new, are high quality and often in good locations.”
This has resulted in a drive across the real estate industry to improve and modernise assets – either by repositioning or refurbishing standing stock, or by launching new-build projects designed to meet future patterns of demand. Such projects were evident across our awards.
Development Financing Deal of the Year: Europe went to the £426 million financing by Blackstone Real Estate Debt Strategies of Brookfield’s One Leadenhall – a new office tower in the City of London. Through the project, which is designed by architect Make, Brookfield is aiming to cater for what many expect will be more discerning office occupiers by targeting the highest environmental and wellness accreditations.
On a smaller scale, but a significant example of a revamp for a dated asset, manager BentallGreenOak’s £55 million loan in August 2021 to London developer W.RE was designed to fund the transformation of a historic department store in South London. The former Arding & Hobbs building had lost its anchor tenant, department store chain Debenhams. With the backing of the BGO loan, W.RE plans to transform the asset into a mix of modern retail, leisure and offices to breathe new life into the property. The deal was voted Mid-Market Financing Deal of the Year (€20m-€70m Market): Europe.
Speaking at the Commercial Real Estate Finance Council Europe virtual conference in June 2021, Alexandra Lanni, head of investments for CBRE Investment Management’s EMEA credit strategies, which was voted Mid-Market Lender of the Year (€20m-€70m Market): Europe, spoke about borrower demand for transformational schemes.
“People are looking at heavy capex, rather than knocking down and rebuilding assets. That is partly due to the environmental considerations of completely rebuilding, but also due to the good availability of debt for redeveloping buildings within an existing envelope.”
4 Lenders believe in the return of hospitality
Few industries were hit as hard by covid as hospitality.
Yet hospitality deals were evident across several of our award categories. While many lenders remain conservative when it comes to financing hotels and leisure assets, several have proved willing to back the post-pandemic future of such properties, where they see a clear story for their future revival.
A prime example was Starwood, Apollo and BREDS’s £1.8 billion financing of Blackstone’s Bourne Leisure platform transaction, which, as noted above, was voted the year’s standout investment financing deal. The lenders underwrote Blackstone’s purchase of holiday parks, caravan sites and out-of-town hotels that cater to domestic UK tourism.
“We have always liked the UK’s domestic leisure sector, in which we have been invested since we entered the European market,” Starwood’s head of lending for Europe, Lorcain Egan, told Real Estate Capital Europe in March 2021. “We really like its long-term fundamentals: there is less supply in the country than in other European countries, and demand drivers are very positive.”
Large-scale platform financing deals were also closed during the year, indicating lenders believe tourist hot spots will return to health in the coming year. For example, Financing Deal of the Year: Southern Europe was awarded to BREDS’s €360 million loan in August 2021 to finance Brookfield’s €440 million acquisition of the management group of Spanish hotel chain Selenta in a deal which saw it acquire four of the group’s five Spanish hotels.
Lenders’ interest in financing hospitality deals reflects the increased investment volumes in the sector during 2021. According to consultant Savills, hotel investment volumes in the UK alone were up 84 percent year-on-year to reach £4.14 billion in 2021, just shy of the 15-year average.
“While there remain operational challenges in the short term, investors continue to be positive on the long-term outlook of the sector and we anticipate another strong year in 2022 for the UK hotel investment market,” commented Tim Stoyle, head of UK hotels at Savills.
5. Lenders have not lost faith in offices
Across the awards categories, there was evidence of debt providers exploring niche and emerging sectors, as well as deploying capital into ‘beds and sheds’ markets – the residential and logistics sectors that have attracted much investor attention in the past year.
However, it was notable that you, our readers, voted for office financing deals in some of the key categories.
As mentioned, BREDS’s development financing of a new office tower in the City of London, One Leadenhall, scooped the sought-after Development Financing Deal of the Year: Europe award. Similarly, Financing Deal of the Year: UK was won by the lenders of a £420 million green senior loan to finance the recently built 100 Liverpool Street in London – a 520,000-square-foot net-zero carbon mixed-use office and retail property on the Broadgate Campus, adjacent to Liverpool Street station.
In September 2021, Real Estate Capital Europe published a deep dive into how lenders feel about the future of the office.
The main message was that lenders accept that the sector is undergoing a huge change, and that what occupiers want from their office space is changing dramatically. Many secondary offices will become obsolete, they agreed, as they fall foul of ESG standards and, more generally, of occupier expectations around the quality of workspace.
However, the lenders we spoke to were clear that they believe offices – and more specifically the best offices a location can offer occupiers and investors – have a future.
The office sector transactions that were voted among 2021’s standout financing deals all relate to the highest-quality office assets their markets have to offer – or schemes designed to deliver such products to the market. Where office deals were among the achievements of bank lenders winning regional awards, the assets they financed were invariably core, prime stock in the best locations.
Financing offices has become a highly selective endeavour for lenders, but our award winners demonstrate there are still important deals to be done in the sector.