Europe’s commercial real estate markets have provided slim pickings for investment banks in the last year or so, compared with the earlier part of this decade.
The big beasts of Wall Street thrive on their ability to arrange and distribute huge loans within tight timeframes. That usually means a focus on big-ticket financings to blue-chip private equity clients in value-add or opportunistic deals.
In this toppy, late-cycle European property market, such opportunities are less frequent. Large-scale investment activity has shifted towards cash-rich buyers from outside the region investing in core property, with limited need for debt finance. In addition, CMBS, a favoured distribution channel for the investment banks in the US market, has been largely untested in Europe since summer 2016, with much of the limited volume of paper issued placed privately.
This is why the issuance by Bank of America Merrill Lynch of a £347.9 million (€393.9 million) UK CMBS deal serves as a reminder that the investment banks are still managing to close some impressive deals, and successfully distribute them – when the opportunities arise.
The deal – Taurus 2017-2 UK DAC – is the securitisation of a portfolio of so-called ‘last mile’ logistics facilities; the sector many believe will be a major beneficiary of the shift towards e-commerce in the retail economy. The sponsor is Blackstone, the most active private equity firm in European property markets. By distributing the loan through CMBS, BAML has demonstrated that there is investor demand out there for such product. Several in the market have tipped their hats to the bank for pulling it off.
Despite CMBS not being regarded as a competitive funding option for the banks for most of this year, they have nevertheless competed hard for the relatively few large-scale financing opportunities to have hit the market.
During Q2, for instance, BAML partnered with Goldman Sachs for the €2.3 billion financing of Blackstone’s OfficeFirst German portfolio. In March, Goldman was the sole underwriter of a circa €500 million loan to Pradera for a pan-European retail acquisition from IKEA. Citi and Morgan Stanley, plus Royal Bank of Canada and Goldman Sachs, are understood to be near closing their €2.6 billion financing of the Finnish Sponda platform, bought by, you guessed it, Blackstone.
The volume of debt syndicated by investment banks this year is unclear, although much of it is understood to have been sold down to insurers, debt funds, asset managers, as well as other banks.
Other business done by the investment banks this year is said to include refinancing of loan-on-loan deals provided in recent years to the buyers of non-performing loan portfolios. There is also evidence of some opting to lend to the real estate market through warehousing facilities, such as the £200 million-plus facility provided this month by Citi to fintech firm LendInvest to support lending into the UK buy-to-let residential market.
As for the prospects for CMBS as a distribution tool in the wake of BAML’s Taurus 2017-2 UK, it is too early to tell whether the deal will revive the market. BAML was able to price the notes tightly, with the AAA-rated notes at 85 basis points. There is not much CMBS 2.0 paper in the market, but there seems to be demand. However, it is difficult for banks to warehouse loans with the aim of creating homogeneous pools for CMBS deals, and large individual loans suitable for securitisation remain limited.
Whatever happens next in the European CMBS market, it is clear investment banks have a continued appetite for real estate lending in the region – when the right opportunities come around.
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