In the first of four installments examining Europe’s real estate lending markets, we consider the UK and Ireland.
THE UK REMAINS ROBUST
As global capital floods in, the nation’s property debt market remains liquid, writes Lauren Parr
Despite uncertainty linked to Brexit, the UK had a bumper year of investment in 2017, with foreign investors particularly active. Volumes hit €72 billion, 9.3 percent up on 2016, according to CBRE data. Debt is available for most real estate strategies, sources note.
“At 140 to 150 basis points for core property deals, base rate margins are better than they are in Germany or the Netherlands, which gives lenders more room to play with in the pricing they charge,” says Bryan McDonnell, head of European senior debt origination at PGIM Real Estate Finance.
There are not many lenders with a reasonably priced cost of capital offering senior debt facilities of sub-£20 million (€23 million) on asset management-intensive commercial investments, says Dan Uzan, partner at debt advisory Brotherton.
The country’s housing shortage makes the nascent private rented sector an attractive opportunity to some lenders. “Rental will be an important part of the overall UK housing requirement and we need a lot more product that currently exists, so the opportunity is for lenders to get in at ground level,” says Riaz Azadi, managing director at Eastdil Secured.
Other active sectors include student housing as the UK’s universities continue to attract foreign students, including from Asia. Last-mile logistics is a burgeoning segment, with dated properties close to transport nodes being targeted. Some also highlight a need for refurbished office space at transport hubs in Greater London.
“The supply of secondary offices in these locations has been hit by the conversion of offices to retail under permitted development and the lack of speculative development finance,” comments Uzan.
Development finance remains relatively scarce, despite many lenders indicating their willingness to provide construction loans. At the smaller end of the market, an increasing number of specialist lenders are filling the gap.
Although many expect the UK’s exit from the European Union to be softer than some had feared, Brexit remains the great unknown. The UK economy has continued to grow and real estate volumes have remained high – partly due to the currency effect sparked by the referendum.
“We’ve seen some Asian capital come in but as the pound strengthens how does that play out?” asks McDonnell. He sees “bumpy tenant movement” and a weakness that needs to work its way through in the office market regarding space that tenants have released but is not yet occupied.
Sourcing big-ticket, core property deals has become more of a challenge, with foreign investors – including Asian sponsors – bringing a significant amount of equity as well as debt capital sourced in their home regions to deals. The high value of prime property in London is also seen as a cause for concern by some.
Interest rates are likely to increase in the UK during 2018. While the Bank of England maintained rates in February, it indicated that earlier and faster rate hikes are on the cards.
WHO IS INVESTING?
As Europe’s largest real estate investment market, the profile of buyers is wide; Asian investors, US private equity funds, domestic and continental European property companies, listed developers and smaller residential developers.
WHO IS LENDING?
The UK is the beneficiary of the diversification of the European real estate lending market, with a large proportion of active lenders based in London. By Savills’ reckoning last June, there are 250 lenders, with sources saying around 100 are frequently active. UK clearing banks, German Pfandbrief banks, other European banks, US investment banks, insurance companies and a range of debt funds, challengers and online platforms are in the market.
IRELAND’S MATURED PROPERTY MARKET
Once an opportunistic hotspot, the country now attracts core investors, writes Daniel Cunningham
In recent years, Ireland’s real estate sector has transformed from being a target for opportunistic private equity investors to a relatively institutional-grade market. There is little room for yield compression, with investors focused on income-producing assets across the office, logistics and residential sectors.
When Dublin’s core property – long-leased to its top-grade occupiers including tech firms – comes up for financing, international banks quote as low as 175 basis points, sources report. Domestic banks tend to struggle to finance property below 200bps, creating room for foreign lenders.
A need for development finance is expected. During 2017, there was an increase in planning applications for a new wave of industrial and logistics buildings, according to CBRE’s 2018 outlook report.
Dublin’s Docklands are gradually becoming the setting for a purpose-built private rented residential hub. Among the developers is Kennedy Wilson, the opportunity fund manager which bought into the Irish market through debt purchases and has stuck around to deliver new schemes.
There is also a continued need for debt to fund discounted payoff deals as sponsors look to refinance themselves from loan positions which traded during the country’s wave of non-performing loan transactions. Several non-bank lenders have emerged to provide this finance. Lenders have been known to charge 7 percent to 8 percent on short-term facilities of up to 80 percent LTV.
The loan sales market has calmed down since the early years of this decade, although in its latest loan sales report, investment banking firm Evercore said it is expecting sales from sellers including AIB, with the potential for TSB and the National Asset Management Agency to bring portfolios to the market.
Returns and transactions volumes returned to more normalised levels in 2017 following three years of outperformance, according to CBRE’s Enda Luddy in the firm’s 2018 outlook report. Marie Hunt, the firm’s head of research in Ireland, remarked that the Irish commercial real estate market is approaching late cycle in many respects.
Some note a liquidity risk, with some foreign lenders reaching country capacity. Outside the country’s main cities – Dublin, Cork and Galway – liquidity decreases significantly.
Brexit also poses a risk. The UK is Ireland’s largest trading partner, creating an uncertain economic future. In addition, the future of the Republic of Ireland’s border with Northern Ireland after Brexit is yet to be resolved.
WHO IS INVESTING?
Ireland’s core property segment has attracted institutional buyers in the past few years. Dublin’s prime offices and the country’s largest shopping centres have been the focus. Hammerson and Allianz own Dublin’s Dundrum Town Centre mall, following a loan purchase from NAMA, for instance. German pension fund Bayerische Versorgungskammer (BVK) bought another prime shopping mall, Liffey Valley, in late 2016.
WHO IS LENDING?
International banks and insurers compete for core financings. A club of lenders led by French bank BNP Paribas and Germany’s DekaBank provided the €625 million refinancing of Dundrum Town Centre last September, for example. Last July, Allianz Real Estate provided €290 million to BVK for its Liffey Valley mall.
The collapse of the Irish banking sector in the global financial crisis took several domestic lenders out of the market. Two that survived and are rebuilding their property loan books are Bank of Ireland and AIB. Foreign debt funds remain active in the value-add space. Last April, Starwood Capital wrote a circa €19 million loan to Irish investor Barry O’Callaghan for an office development in Dublin.
France and the Netherlands will be featured on 28 February, followed by Germany, Central and Eastern Europe and the Nordics on 1 March and Southern Europe on 2 March.