Lenders’ guide to Europe, part 2: The Macron effect lifts France

In the second installment of our guide to Europe's lending markets, Lauren Parr examines the French and Dutch opportunities.

Lenders’ guide to Europe, part 1: The UK and Ireland

THE MACRON EFFECT LIFTS FRANCE

Sentiment towards the country has improved and development is under way, writes Lauren Parr

THE OPPORTUNITIES

Last May’s election of centrist Emmanuel Macron to president is creating a bullishness around France, with a surge in investor optimism driven by his pro-business approach expected to lead to larger real estate investment volumes and, therefore, financing opportunities in 2018.

The improved economic sentiment has led to more development financing opportunities, particularly in the Paris office sector.

“Take-up has been sound and stable over the past two years – on average 2 million square metres per year in Paris – and now rents are going up, so there are a number of larger new developments and refurbishments, particularly in La Defense,” says Roland Fuchs, head of European real estate finance at Allianz Real Estate, adding that there are more speculative schemes.

“There is a lot of regeneration happening in areas in the north of the city, where the 2024 Olympics is set to be held, which could create good lending opportunities,” adds Roman Kogan, head of Deutsche Bank’s European commercial real estate group.

Senior debt pricing currently stands at between 200 and 300 basis points for development financing, a minimum of 200bps for office assets in transition or with limited income, and around 100bps to 130bps for core, well-let and well-located assets, according to debt advisory firm First Growth Real Estate Finance.

Student housing and assisted living are also seen by some as interesting sectors. Despite being continental Europe’s second-largest market, there is limited competition from senior lenders who are still behind the curve in terms of their understanding of such alternative asset classes.

There is also scope to provide whole loans for operating assets including hotels, care homes, senior housing, flexible office space, build-to-rent, and urban logistics. “These are sectors that are growing quickly and where traditional lenders are limited in terms of leverage,” says Cyril de Romance, co-founder of First Growth.

THE RISKS

Valuations are at an all-time high in some segments, which means lenders are being more cautious in their projection assumptions including exit and refinancing values and have increased their focus on quality of rental income and debt service coverage.

In addition, legislation remains borrower-friendly and enforcement can be a lengthy process. “It can take more time to recover assets but lenders with a first-ranking mortgage are well protected. While the probability of default can be higher in France, there is low expectation of loss overall,” says Cyril Hoyaux, head of debt funds management at AEW Europe.

WHO IS INVESTING?

The main players in the core space are French insurers, funds and property companies and German insurance and open-ended funds, with more international investors growing in confidence about investing in France. Investors from Asia, notably Korea, are also actively trying to enter the French market. Such investors are equity-rich and often require low leverage. Opportunistic funds represent a smaller proportion of investment capital due to the lack of appropriate opportunities.

WHO IS LENDING?

The senior lending market is dominated by French, Dutch and German banks. Insurance companies are also active in the core segment, though not all have the resources to lend directly. Several France-headquartered debt funds are being raised.
Overall, competition is growing with the emergence of new entrants, such as Amundi in 2018, and could force lenders to agree to higher LTVs and lend against more secondary assets. The subordinated lending space is more granular with significant differences in terms of risk appetite and pricing. Opportunistic players such as Blackstone and BlackRock are present on the mezzanine side. n

 

GOING DUTCH

Office oversupply has fallen and opportunistic deals still provide possibilities in the Netherlands, Lauren Parr finds

THE OPPORTUNITIES

The Netherlands’ property market has staged a strong recovery on the back of GDP growth of 3.1 percent in 2017, better than many European countries.

The acute post-crisis office oversupply has been reversed due to rising employment and strong occupational demand in the larger cities. Many vacant Amsterdam offices have been converted to residential.

“We saw a lot of investors buy value-add offices over the last couple of years. These opportunities are now rare and assets have either been sold or refinanced,” says Maud Visschedijk, from Cushman & Wakefield’s debt and structured finance team in the Netherlands.

Loan pricing in the prime office segment is competitive, at less than 100 basis points at 65 percent loan-to-value, according to Visschedijk. Opportunities for high-value lending include secondary retail, which the agency says can generate 350bps to 450bps.

“We see a chunk of high street retail assets and shopping centres in the pipeline yet the sector is undersupplied if you look at interest from lenders; if I were a debt fund this is where I would focus,” Visschedijk says. There are few active lenders in the sub-€10 million space, although with loan sales taking place and discounted payoff deals to be done, investors are aware this is a gap in the market.

“Lenders have targeted the Dutch market because of the strong economic performance, good returns and transparent legal system,” says Visschedijk. “In general, debt funds can still benefit from opportunistic deals – i.e., short leases, significant vacancy or capex backlogs.”

THE RISKS

The Netherlands is becoming crowded from an equity and debt point of view. “Prices are going up quite a bit and really good equity deals are harder to find which means our clients might not win as much. Because product is more expensive, as a lender you need to work harder to understand it; debt per square metre is higher than it was a year ago,” says Jim Blakemore, partner at GreenOak Real Estate.

Investment banks have re-entered the market and are willing to provide smaller financing tickets of €40 million to €50 million, creating a more competitive field. Traditional lenders are also moving further up the risk curve, including lending in secondary locations with higher vacancy rates.

WHO IS INVESTING?

Yield compression has brought long-term investors to the market. For instance, South Korean investment fund Koramco, along with Amundi, bought the Atrium office building in Amsterdam for around €500 million in July 2017.

Cross-border investors were responsible for 64 percent of the €20.3 billion of investment deals in 2017. UK and US investors represented the biggest source of capital, while German and Belgian investors are also active.

WHO IS LENDING?

Local banks including ING and ABN Amro, as well as German lenders have dominated. “Pfandbrief banks were always quite picky and used to focus only on larger cities but are now willing to look at smaller cities, as well as providing higher leverage on bullet structures at very competitive pricing,” says Visschedijk.

Of the investment banks, Goldman Sachs is active in the Netherlands, while Morgan Stanley has a Dutch origination team that can write deals as small as €10 million. Debt funds including DRC Capital and GreenOak are active, with the likes of Tyndaris and GAM focusing on mezzanine and larger whole loans.

Germany, Central and Eastern Europe and the Nordics will be featured on 1 March, followed by Southern Europe on 2 March.

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