Observations on an uncertain market

In the last couple of weeks, sources have told us Europe’s property lenders have either hit pause on their activities, are locked in discussions with their sponsors about short-term financing needs, or are attempting to identify opportunistic situations. In short, the market remains highly uncertain as the covid-19 crisis unfurls.

However, reactions and data from the industry provide insight into how lenders and borrowers are dealing with the situation. You can find our full, in-depth coverage of the impact of the coronavirus here. These are a few of our observations:

German banks admit predictions are futile: Whatever financial modelling is being applied behind the scenes, Germany’s major real estate banks took a similar line on covid-19 in the last week as they announced their 2019 figures: the impact on real estate financing activity is impossible to predict. The chairman of Frankfurt-based Helaba, Herbert Hans Grüntker, said the economic consequences will be significant, but that there is no reliable basis on which to forecast the bank’s 2020 performance. Berlin Hyp said it expects a significant decline in its 2020 results, but that it is currently impossible to “estimate the burdens” from the coronavirus.

Some debt providers are gearing up for opportunity: In a letter to shareholders dated 23 March, Bruce Flatt, chief executive of Canadian property giant Brookfield, said the team at Oaktree – the credit-focused company Brookfield bought last year – is accelerating the deployment of its current distressed debt fund and is preparing to launch its next vehicle. “We partnered with Oaktree last year in anticipation of the debt markets unwinding,” said Flatt. “Now it’s taking place.”

Sponsors are dealing with a lack of income: The crisis hit home for many borrowers when the second-quarter rent day fell on 25 March. Covid-19 seems to have compounded Intu Properties’ problems. The shopping centre owner reported receiving just 29 percent of rent, compared with 77 percent at this time last year; it is now discussing covenant waivers with lenders. Across the market, landlords face scrutiny over their dealings with tenants. On 25 March, the Financial Times reported that tenants of Blackstone and Telereal Trillium’s UK railway arches portfolio had sought a rent-free period but had only been offered a deferral; two days later, the joint venture’s The Arch Company announced a three-month rent-free period. There is mounting pressure on property owners to do the right thing, which will ultimately impact their own loan repayments.

US credit conditions look highly uncertain: Europe’s real estate financing sector remains hard to read, but the US commercial mortgage-backed securities market is providing a glimpse into credit conditions. On 23 March, S&P Global took various rating actions on 24 of the country’s CMBS transactions due to underperforming retail loans, and lowered the ratings on 60 classes of notes. Although the rating agency said the actions were not specifically in response to the outbreak of covid-19, it added that the virus will have exacerbated declining performances. In a separate report, S&P said US lodging-backed CMBS are braced for the impact of the coronavirus, with demand for hotels having been brought to a halt.

Some property deals are still closing: Real Capital Analytics said the number and value of European commercial property transactions in March will be low in comparison with recent years, but noted the completion of several large deals. The data provider reported that on 27 March it was announced that a member of the Qatari royal family had bought London’s Ritz hotel for a rumoured £800 million (€886 million). Also last month, German insurer Allianz and Finnish insurer Elo Mutual acquired a share of a Spanish and Portuguese shopping centre portfolio for €935 million. These deals will have been a long time in the making, however, and lenders are likely to be facing a more limited pipeline in April.

Email the author: daniel.c@peimedia.com