International banks feel the allure of US lending opportunities as European market slows
Plenty has been said about the slowdown in European transaction activity this year, a confluence of investor caution about historically low yields in certain markets, and next week’s EU referendum in the UK.
It’s interesting, therefore, to check in with the European bank that lent the most on commercial property last year, ING. The Dutch headquartered lender’s total origination in 2015 was €13.7 billion in around 80 deals.
Surely, this year things must be very different? The response from head of Western Europe & US real estate finance Mike Shields, is surprising. He says his bank’s lending volume as of June is pretty much keeping pace with last year.
Yet… France has been “really slow”, and it was the bank’s top market in 2015. Its home market, the Netherlands, “is slow”. So is the UK, though ING closed a £400 million refinancing of Heron’s London Salesforce Tower, and the pipeline – Brexit discounted – is “promising”. The bank has financed some Italian shopping centres and expects opportunities to pop up in Spain soon.
But top of the leader-board in 2016 by some measure has been the US, a market ING re-entered last year for the first time since the financial crisis. In May alone, Shields’ four colleagues in the New York City office closed $1.1 billion of loans, including a $500 million nine-month bridge for The Olayan Group on Manhattan’s Sony building.
Despite the fact that ING has no dollar deposit base anymore in the USA, meaning that it must factor in the expense of shifting euros to dollars, Shields says it’s still a great place to be lending right now.
“Margins had come down in Europe so much, but the US has really stuck out. Margins there have really caught up, and I think from a fundamental perspective it’s a healthier market… you’re doing a deal at 50 percent leverage in Manhattan at 250 basis points [but] the same deal in London or Madrid at 150 bps.
“The deal flow is 15 deals a week and you go after the two you like. Whereas in Italy, there’s perhaps only 15 deals a year that you even want to do, and you better have a good hit rate!” he adds.
ING is not alone. pbb Deutsche Pfandbriefbank, newly-free from German government ownership, is said to be seriously interested in restarting its US lending. A source said that pbb sees opportunities opening up for balance sheet lenders, particularly as the CMBS market falters. Per last week’s Weekly Digest, banks increased their market share in the US last year and originated more than any other lending group, while CMBS is shrinking.
International banks are also looking stateside and girding up to invest this year. Japanese bank Shinsei will start lending in the US in 2016, a source said. The bank has taken participations in around 10 loans in central London since it started lending on real estate outside its domestic market two years ago.
With London assets very expensive, or at least fully-priced, Shinsei increasingly feels it’s no longer wise “to have all the eggs in one basket”, the source says. Rather than diversify into Europe’s multiple jurisdictions, its small real estate team can deploy balance sheet loans more efficiently in the US, with New York and other gateway cities like San Francisco the likely first ports of call.
Other Japanese banks, including Aozora, are also interested in US lending opportunities. So Japanese banks diversifying their international real estate lending from London could become a trend.
But for ING, even the success of the new US operation won’t push the bank up to last year’s exceptional lending tally, which saw a flood of business closing in July and August that isn’t in the pipe this time.
And then there’s the possibility of Brexit. Says Shields: “If the UK stays in there will be a return to normalcy, but if it’s an exit it will be uncertain for a while.”