Prime deals shortage holds up return of the big lenders

When William Newsom steps into the Savills Café on the Croissette in Cannes on 15 March and circulates his famous list of active lenders to clients and journalists at the annual Mipim property conference, the number of names may not have gone up by very much from late last year. The list was 23-strong when updated last October and several large banks have come back into the market since then, notably Deutsche Bank and Bayern Landesbank. They will undoubtedly feature.

However, the problem for quite a lot of those 23 lenders has been sourcing deals, and some have done very little, if any, new lending. Somewhat ironically after all the talk of liquidity drying up for borrowers, it is lack of product rather than lack of access to funds that is keeping lending low. So far in 2010, there has not been much sign of this changing very significantly.

Cash buyers still dominate the market and most, though not all, buyers still want prime property, which remains scarce. “We were really stretched in the last quarter of 2009 and we were expecting 2010 to be really busy, but the first quarter of this year has actually been quieter than we were hoping for,” laments an experienced originator in the London office of one German bank. “All the people we talk to are quite nervous about tenant risk.”

Andrew Goodbody, head of DG Hyp’s London office, agrees. “There are precious few deals and we are all scrambling after the same things,” he says. Liquidity has undoubtedly continued to improve since the lending and transaction markets started to pick up by the middle of last year and banks that had been closed cautiously re-opened. There is a little more light and shade between active lenders than a year ago.

“A lot more banks are in the market now and they all have massive targets,” says Ed Daubeney, a partner in corporate finance at Cushman & Wakefield. “Last year there were only three that would do deals of £100m plus; now it is into double figures.” These lenders include WestImmo, Eurohypo, Barclays Commercial, Santander Corporate Banking, DG Hyp, Helaba, Deutsche Bank and annuity lender Aviva.

German banks keen to lend

The German specialist real estate banks, whose raison d’etre is to lend on property, such as WestImmo, Eurohypo, DG Hyp, Deutsche Pfandbriefbank and Helaba, would like to lend more than last year. “We are a pure real estate finance bank and have a definite target,” says Goodbody. “We hope to lend £500m-£600m in the UK this year, but if we were to do more, that would be OK. However, we think that is a realistic number.” Eurohypo UK head Max Sinclair says: “We want to lend £2bn this year, which is twice last year’s volume.”

WestImmo says it does not have a UK target as such, but last year in the UK it was probably the top, or one of the top two, lending banks, alongside Eurohypo. It was also an active lender in France and Poland, and plans to remain so. Deutsche Pfandbriefbank and Deutsche Bank are only recently back with mandates to start new lending in the UK and western European markets after dealing with difficult internal issues.

Pfandbriefbank’s European international business (excluding Germany), which is led from London by Harin Thaker, wants to lend in France, the UK, Poland, the Czech Republic and Spain. It is said to have a 2010 lending target of somewhere between €1bn and €2bn across Europe. Last year Deutsche Bank got a pfandbrief licence, issued a €1bn jumbo issue of the German mortgage-backed bonds and in the autumn resumed new lending and refinancings. However, so far it has financed only one UK transaction: Said Holdings’ £208m purchase of 5 Churchill Place at Canary Wharf.

The bank is targeting the same European markets as its German rivals but will look at all asset classes. The other notable new bank on the block is Bayern Landesbank, which has let it be known that it would like to lend £1bn in the UK this year.

Late last year the bank’s London origination team, led by Mike Worley, restructured the loan on Allen & Overy’s City of London headquarters Bishops Square, bought from Hammerson by the Oman government. What borrowers really want to know, however, is how homogenous are these active banks; will they lend on anything other than prime property; will their terms become more flexible; and will borrowing get cheaper?

Despite the shortage of deals suitable for financing, banks don’t view cheaper debt as a good point of differentiation from rivals for increasing their business. However, according to some in the market, borrowing for £25m-£50m lot sizes of prime property in plain vanilla, bilateral deals has already got slightly cheaper.

CB Richard Ellis said this month that it believed pricing had fallen across Europe (see table). With the improvement in investment volumes in the second half of last year and the rise in capital values in some markets “banks find themselves in a more confident position to lend”, CBRE said. “This shift in sentiment has led to increased competition among debt providers to offer improved lending terms on loans secured against prime assets.”

Loan sizes increasing

Natale Giostra, now CBRE’s head of European debt advisory work, based in London, said at the time: “Maximum loan size is generally increasing, with maximum loan to values also increasing, to 60%-70% when secured on prime property, while margins have fallen across most markets.” It is not easy to find examples of banks lending at 70% loan-to-value levels. Few credit committees would agree that the 65%-70% LTV tranche counts as senior debt these days.

Sources of subordinated lending are starting to appear for those borrowers with the appetite for higher – and more expensive – gearing. Last year, Longbow Capital arranged mezzanine loans for both Delancey and private equity fund MGPA. This year a handful of new mezzanine funds are doing their first deals, including the Duet European Real Estate Debt Fund and the M&G Real Estate Debt Fund.

GIC has formed a partnership with Deutsche Bank whereby the Singaporean sovereign wealth fund will offer junior debt to the German bank’s senior debt clients. GIC provided the top slice of the £135m the pair lent on Churchill Place.

Alternative sources of senior funding are also starting to appear over the horizon. Insurance giant Axa’s Real Estate Debt Fund, which is run by Isabelle Scemama from Paris, is active in the market, while boutique finance company Bell Capital Partners is setting up a club of European senior debt investors. Others in the market also think this private placement market for debt will grow in 2010, including JC Rathbone Associates (see Viewpoint, back page) and former securitsing bankers such as Natalie Howard.

Caroline Snowden, a director at debt consultancy JC Rathbone Associates, said at a breakfast for clients on 3 February: “A new syndication market could evolve. We are looking at that for £200m-£300m lot sizes with a number of investors – we see it as a new product going forward.” Most new entrants to this part of the market will want to earn higher returns by offering debt on very large deals, which are still very difficult to arrange and where the costs and fees are, as ever, most lucrative. Bell Capital Partner’s Robert Bell said at the same JC Rathbone breakfast meeting: “We believe the banking market is still available for £50m-£100m deals, but for transactions that need more – £200m, £300m or more – you are stuck. You need to collect several [banks] in one room which is extremely injurious to your health.”

A tough deal to finance

The largest European financing last year was for BBVA’s disposal of a sale-and-leaseback portfolio of bank branches in Spain. Insiders say this deal was very difficult to finance and took between six and nine months to arrange. Led by RREEF, it involved three of the fund manager’s own funds and two other private equity partners, Europa Capital and AREA Partners, after Perella Weinberg pulled out – plus 12 banks.

BNP Paribas was one of the original joint arranging banks on the deal but also pulled out. JP Morgan stepped in as arranger alongside Deutsche Bank. However, the size of the transaction had to be cut down from €1.6bn to €1.2bn. JP Morgan is said to have been left with €400m of this on its balance sheet, when it had hoped to distribute much more.

Finance for secondary deals and development is still nonexistent, but a lot of experienced bankers who used to be able to lend to property companies on deals with angles and on development would like that to change.

Cushman’s Daubeney says: “At some point banks are going to have to start lending on good secondary property – if they have targets to meet.” Andrew Goodbody believes banks might loosen the reins later this year “if there’s not enough prime property and if, for example, the deal is still a great property in a great location, but perhaps has some sort of issue with the lease.”

However, some banks that previously supported developers and property companies that sweat assets simply cannot do this kind of business any more. Liz Edwards, head of Landesbank Berlin’s London office, which is in the market to lend on prime property, says: “Our bank is being very conservative and that cuts out the kind of things we would have done a few years ago. We wouldn’t even look at development – it is just not our strategy.”