Positive notes set the mood music at property’s party

Leap in deal volumes gives upbeat atmosphere to this year’s MIPIM, reports David Hatcher

Literally and metaphorically, the music was playing at Europe’s largest property festival this year. In fact, at MIPIM’s parties such as the ones thrown by Tristan Capital and Legal & General, it went on well into the night.

The party mood at MIPIM
The party mood at MIPIM

A slew of agents’ deal-volume surveys out for MIPIM week showed how vigorously it played last year – Knight Frank’s, for example, had deals up 44.6% in the Netherlands, 89% in Ireland and 144% in Spain, while Savills logged a 36% jump overall to €200bn in Europe’s 15 largest markets. Though sadly there are no such statistics for the level of lending fuelling this wall of sound, we can be sure debt was helping to turn up the volume.

Judging by the conversations on the Croisette, the music shows no sign at all of stopping. Here Real Estate Capital brings you some of those conversations you may not have been party to.

 Japanese look West

The German banks are the envy of many European lenders, their pfandbrief funding allowing them to lend at levels other institutions would find unprofitable. There are few cheaper debt sources, but one group on the horizon is the Japanese banks.

With Japan’s 0.1% base rate, the returns on lending to prime European real estate look pretty good. Some delegates doubted that many Japanese banks have the knowledge and set-up in Europe to transact deals quickly, but their unrivalled cost of capital and desire to get involved are good news for syndicating investment and commercial banks.

Sumitomo’s real estate finance team, led by David Wasserman, linked up with BNP Paribas to provide half of a £201m loan to Grosvenor’s London Office Fund at below 120bps last year. It also bought a tranche of debt held against Delancey’s Walbrook building, now up for sale.

Japanese banks Sumitomo, Shinsei Bank and SMBC are buying part of ING’s £365m loan on the Gherkin, issued in November at 120bps, and a bank consortium from the country is thought to be providing a £350m loan for Stanhope’s and Mitsui Fudosan’s development of the BBC Television Centre at White City in west London.

 Tricky start to pbb sale

One of Europe’s largest real estate lenders, pbb Deutsche Pfandbriefbank, must be sold this year through a flotation or private sale. The sales process has only just kicked off, but there was plenty of speculation about the bank’s fate on the Croisette.

“There is lots of capital, from all sorts of sources and everyone is looking to place their money. So everyone will want to take a look,” said a banker from a rival German lender. “It’s like a street with one house for sale; everyone will look, but they won’t mention a price.”

It hadn’t gone unnoticed that pbb’s €120m provision on 6 March against Austrian nationalised bad bank Heta Asset Resolution — set up to sort out defunct lender Hypo Alpe Adria’s assets — was not the best way to start the sale. The Austrian Financial Market Authority’s shock announcement that it was halting debt repayments from Heta caused a string of German banks that hold around half Heta’s liabilities to make provisions.

With exposure of €395m to Heta, pbb said its €120m provision to cover potential losses cut preliminary 2014 profits to €54m.

Fitch Ratings said the situation could derail Lone Star’s sale of Duesselhyp. “As a German tax-payer, I want pbb sold at the best price possible, ” said one MIPIM attendee. However, as a one-off set-back, others suggested it was unlikely to put-off serious contenders for pbb.

Appetite for Ireland

The Irish market has been roaring back for at least two years on the equity side and now more lenders are rallying behind their clients, led by investment banks. Deutsche Bank’s lending has paid dividends, allowing it to issue a €175m CMBS in the week after MIPIM and take an arbitrage on three completed deals.

Local lenders such as Bank of Ireland are active while new lenders such as Wells Fargo, ING and Allianz are scouting around. MetLife sealed its first, €131m Irish loan, for Kennedy Wilson and Fairfax, the week after MIPIM.

Margins for top Dublin assets are now below 200bps and some early entrants are looking to cash in. The big deal on everyone’s lips is the €650m mandate to refinance Green Property’s 1.5m sq ft Blanchardstown town centre near Dublin. A bank club that put up part of the existing finance is likely to be up against investment banks and big mezzanine players.

CMBS isn’t so simple

The mantra of investment banks returning to securitisation has been that everything has got to be kept simple, with not too many loans, borrowers, jurisdictions or sectors in one deal.

But in Cannes, there was talk of CMBS financing non-performing loan portfolios, an exit strategy being mulled by more than one bank. This would be mainly for UK and Irish collateral, as the Continental enforcement process makes doing so more complex.

One investment bank is also understood to be looking to warehouse the senior portion of whole loans issued by a debt fund and distribute them as a CMBS.

LTVs creep up again

Despite a consensus that “this isn’t 2007 all over again”, partly because the buoyant market is not as driven by debt as it was back then, loan-to-value levels are creeping up.

Private equity firms have not been shy of asking for debt around the 80% LTV mark, unthinkable only a year ago. Writing whole loans and syndicating junior pieces has been a way to meet the desire for higher leverage, but as LTVs inch higher, having an efficient strategy for doing so is becoming more important.

Those mezzanine lenders that have seen returns squeezed have a new area to operate in if they are able or prepared to move up the risk curve. Meanwhile, one delegate said that at least one senior debt fund, with a 65% LTV cap and a 250bps return over gilts, has gone back to investors looking to extend its investment period and/or reduce its returns.

Missing from MIPIM

While the throng of parties and the Istanbul tent’s booming rave music sent the 22,000 delegates into a haze, others stayed away.

The managers of one property company investing for an ultra-wealthy private investor were understood to have gone to the Far East instead, simply because they are struggling to find fair value in Europe — and wouldn’t miss many phone calls in London in MIPIM week.

Another senior private equity investor told Real Estate Capital from London: “Just let the music keep going for another three years so I can get out before it all goes wrong again.”

 Canny players are tempted to cash in assets

REC 04.15 - 23Many investors savvy enough to have bought at the bottom of the cycle now must decide whether to stick or twist — to sell now or refinance? If you sell, how good must the price be to exit an asset you like? And what else will you do with the money? If you are a fund manager and your investors decide to sell everything, can you tell them it is a great time to commit to another fund?

Plenty are, including CBRE Global Investors, AXA and Tristan Capital. If you do refinance, how good must the margin be to offset the temptation to take the money? And should you lock assets away for a long time, taking advantage of still record-low rates?

This discussion is going on everywhere. Here’s just two examples: Oxford Properties kicked off a £270m refinancing of City office building Watermark Place (pictured) in January, but interest to buy the asset has turned heads. A refinancing or outright sale are both possible, or Oxford may hedge its bets and sell a stake and lock the rest down with long-term debt. Lone Star sought a £300m refinancing for its Project Holly Irish assets in January, but during MIPIM decided to keep part and sell the bulk for £266m to Starwood Property Trust.