The fireworks celebrating MIPIM’s 25th year were impressive and so was the mood on Cannes’ Croisette. So exuberant were the 20,500 delegates about improving European property markets that the chief talking point by the middle of MIPIM week was whether we are already back in 2006 territory in terms of the speed of the turn around and the weight of capital chasing assets.
“My strongest takeaway is the positive, optimistic mood, which I hope doesn’t get too silly,” said Anne Kavanagh, AXA Real Estate’s head of global asset management and transactions. “We’ve enjoyed having a less competitive market – we’ve done some great business in the past few years because we’ve had equity at an interesting point in the cycle.”
At a panel session on the pros and cons of joint venture investing, co-chaired by Real Estate Capital, the six panellists said they alone had almost €30bn of equity to invest in property, mainly in Europe. They included AXA Real Estate CEO Pierre Vacquier; sovereign fund ADIA; Olivier Piani, CEO of Allianz Real Estate; Wenzel Hoberg, European property head of the Canada Pension Plan Investment Board; and Union Investments’ managing director Frank Billand.
Such equity heavyweights still pick up the lion’s share of very big deals – Kavanagh said AXA had invested €4.5bn in joint ventures or club deals over the past two years.
Debt players are back in the game
But these investors now face intense com-petition from debt-backed investors. Debt is plentiful again in Europe’s main markets and is available almost anywhere, at a price.
Bank of America Merrill Lynch’s new head of origination, Tim Rosenberg, was in town, telling people that the US bank could lend up to €10bn on European property this year if it can find the deals.
The competition to lend is already manifest in the first signs of laxer lending terms, said UK and German pfandbrief bankers, in the form of higher loan-to-value levels for “senior” debt, and looser covenants – though not by their banks, of course.
“UK shopping centre financings were at 60% LTVs but are now at 75%,” said Mark Titcomb, DekaBank’s UK head. Five-year, interest-only loans are commonly available again, but often with cash-sweep covenants.
A frequent comment was that margins have been falling again rapidly, especially in the UK, making it challenging for new market entrants without large origination teams, and nigh-on impossible for funds that launched a year or more ago to make the same returns now, wherever they invest in the debt capital stack.
Squeezed on pricing by insurers
One UK lender said his bank was being squeezed on senior debt pricing by insurance companies, some of which have been offering cheaper, longer-term financing than his bank can price on five-year terms.
“So, for our important clients we will go under our hurdles if there are other services involved – private banking, or deposits, or hedging for example,” he added.
Increasing competition to lend was creating an overheating market and is the biggest challenge facing the real estate market this year, felt delegates who went to the Loan Market Association’s inaugural MIPIM panel session.
On the panel, Jamil Farooqi, a director of real estate finance at M&G Investments, said his firm is eyeing the Spanish market as a possible source of new debt investments, although fellow panellist John Feeney of Lloyds warned that “some new lenders rolling up in Spain and Italy are not pricing in inefficiencies in enforcement”.
Delegates there ranked alternative sectors such as student housing, healthcare and retirement homes with strong rental prospects or distressed assets as having the most financing potential in 2014.
All this is good news for both borrowers, and debt investors with realistic return targets who are happy to take loan participations. The syndication market is definitely back, giving the likes of Lloyds, Barclays, Aareal and Helaba, as well as BAML, the confidence to underwrite bigger transactions.
BAML said it would aim to syndicate 80- 90% of its loans, while Lloyds’ large corporate lending division would syndicate 50% of its loans, if it can do so profitably. As a result, while last year £100m was a big ticket for a single underwriting, it is now £300m-plus.
The extent of the move by former bricks-and-mortar-only investors into property debt was another clear trend. AXA Real Estate issued a press release saying it carried out more than €9bn of property transactions in Europe last year.
Some €3.2bn of these deals were sales and of the €6bn that were acquisitions, almost half, or €2.9bn, was lending on property or infrastructure.
AXA Real Estate lends on behalf of 40 insurance companies, pension and sovereign funds, and the view of the firm’s head of business development, Deborah Shire, was that “debt investing is not tactical, it’s long term. Institutional investors are looking for ways to diversify fixed-income portfolios.”
As with equity investments, AXA is looking at debt investment throughout Europe, including southern Europe. “We want to be agile across sectors and locations, because at any time we can have stronger competition in certain markets and we don’t want to be forced to invest there,” said Shire.
Allianz Real Estate is another big investor that is channelling capital into property via debt as well as its mainstream business of buying and managing buildings (see news). One talking point was whether everyone will be able to find investments at the returns they want – or will markets get too hot?
At the opportunistic end of the market, pricing has moved extremely fast, said Rob Brook, Patrizia’s UK managing director. Last June, in partnership with US oppor-tunistic buyer Oaktree Capital, his team agreed to buy IQ Winnersh, a 1.4m sq ft industrial and office estate near Reading, with average lease lengths around five years and some vacancy.
At that time, when the UK recovery was far from established, they paid £245m, £20m above the asking price, reflecting an initial yield of around 7% with rental guarantees. Another dozen opportunity funds had bid. The estate’s value increased by 6% in Patrizia’s and Oaktree’s first three months of ownership, and yields have compressed by 50bps, Brook says.
“Huge change in the debt market”
“Another thing for us was a huge change in the debt market, which moved in our favour by 100bps,” he adds. “When you add that into the model it changes things. And we could have got 10 different offers. Also I was convinced that things had turned on the occupier side.”
In Kavanagh’s view, markets have not over-reached themselves: “You could argue that we’re back to a normal, functioning market and, of course, we’re all more global now. It won’t be a blanket recovery. Occupiers are still discerning about the type of accommodation they want and what they’ll pay for it. The business cycle is getting shorter and the margin for error is less. It’s essential for us that we stick to things we are good at.”
Russell Platt, CEO of private equity firm Forum Partners, which recently formed an alliance with La Française, added: “I think we’ve got a long way to go in this cycle. People are saying its like 2005 or 2006. Generals always want to fight the last war, but this is not the same. The market remains fairly narrow, values are still broadly lower than in the last cycle and the level of institutional capital raising is still down.”