Why the force is with the refinancing market

London’s Salesforce Tower transaction typified CRE market conditions in the early part of this year. Nigel White of Mayer Brown explains how.

One of the stand-out commercial real estate financings in the first quarter of 2016 (albeit that the closing slipped into April) was the joint underwrite of a £400 million (€510 million; $578 million) five-year senior term loan to refinance London’s Salesforce Tower (formerly the Heron Tower) provided by ING Real Estate Finance and Landesbank Baden-Württemberg (LBBW).

Nigel White is a partner in law firm Mayer Brown’s Finance Group in London
Nigel White is a partner in law firm Mayer Brown’s Finance Group in London

The financing represents a loan-to-value (LTV) of around 56 percent (valuing the building at around £720 million) and follows a period during 2015 when the consortium behind the building was considering a potential sale following a number of unsolicited bids to buy it for as much as £800 million from investors based in Asia and the Middle East.

Last June, a potential sale of the Tower to Beijing insurance giant Anbang Insurance was actively being considered, which was followed later in the summer by talks with Japanese engineering and construction firm Takemake Corporation, reportedly in deals for about £750 million and £720 million respectively.

The reasons for these sales not reaching completion have not been made public but were likely to have been at least partially driven by fears over weakening in the growth of the Asian economies and the resulting turmoil in local stock markets.

Accordingly, the owners decided to pursue a refinancing in the autumn of 2015 to take advantage of significant increases in value since the then-current facilities were put in place in 2013 following a well-publicised shareholder dispute.

The financing in 2013 (a £270 million five-year loan) was provided by Starwood Property Trust (with approximately £210 million being funded effectively as a corporate credit line for Starwood’s financing via a LIBOR-based collateralised term facility). At the time the asset was far from stabilised with an estimated 35 percent still to let and the pricing of the facility will no doubt have reflected this.

Bearing in mind that the Tower was fully let at the end of 2015 (although floors 34 and 35 are up for rent again after Dan Wagner’s Power Technologies collapsed into administration earlier this year), the pricing and appetite for this debt will have been a significant motivating factor in bringing this refinancing to the market ahead of its existing debt maturity.

The refinancing is a good example of significant competition and liquidity remaining in the loan markets in 2016 for the right assets.

It is also arguably indicative of other market trends for 2016:

Sales slowdown

The Royal Institute of Chartered Accountants reported in its Q1 2016 UK Commercial Property Market Survey that 80 percent of the London contributors to its Q1 2016 survey raised concerns around the UK’s referendum, resulting in decreased investment. Indeed, according to the Cushman & Wakefield Q1 Central London Marketbeat publication, investment volumes in central London commercial offices dropped to £3.7 billion for the first quarter of 2016 as against £4.6 billion for the same period last year, a fall of 20 percent. Although the figures still remain at a 7 percent high compared to five-year averages to Q1, there has clearly been some hesitation from both domestic and overseas investors.

Different commentators have expressed views for the cooling down in the volume of sales so far this year. Most however seem to agree that Brexit has at least played a part in this during the first quarter of 2016. Investors have voiced concern at the price of core assets, and many investors have been holding off for the result of Britain’s referendum on whether to remain in Europe.

There is no doubt that the uncertainty surrounding the outcome of the referendum and additionally surrounding the implications (especially in the short and medium term) of how a decision to leave the EU might impact the British economy and real estate values, has played a big role in shaping real estate investment and finance activity in 2016.

In addition, the continuing turmoil in Asia, which played a part in the abortive sales discussions surrounding Salesforce Tower last summer, are still with us. In central London, overseas investment declined by 40 percent in the first quarter and domestic investment by 20 percent, since the high levels in the last quarter of 2015.

Chinese investors have traditionally been key players in investment into central London real estate, however this declined in the first quarter of this year. China’s economy is growing at its slowest pace since 1990, and Chinese regulators have imposed greater restrictions on the outflow of capital from China, making it harder for Chinese companies to make foreign investments. With Chinese investors typically being at the forefront of overseas investment, this has had a knock-on effect on the levels of interest seen in central London real estate.

Refinancing opportunities

All of the above resulted in a slightly ‘stop-start’ aspect to sales activity during the beginning of 2016, which is arguably likely to increase the trend for refinancings this year (ahead of scheduled maturity of existing debt packages) in which investors take the benefit of strong appetite from the bigger real estate finance lenders and the current interest rate environment.

The Salesforce Tower refinancing is an example of the above. There are others, for example London’s Devonshire Square was also refinanced in May this year in a five-year term loan facility for £320 million provided by Morgan Stanley, based on an LTV of 63 percent. Last year it was widely reported that Blackstone, the owner of Devonshire Square, was looking to sell the estate for around £550 million but took the property off the market due to the turmoil in China. Blackstone is intending to invest £50 million in the estate to refurbish and create new leasing opportunities.

A couple of ancillary trends that may also be illustrated by the above deals are:

Strong syndication markets (for the right product). It is understood that LBBW and ING engaged with approximately 10 to 12 syndicate banks when considering subsequent distribution plans for the Salesforce Tower financing. Those syndication arrangements evidently progressed well with strong interest from syndicate banks.

Joint underwriters. On the larger transactions, where a single underwrite is problematic for credit reasons, there may be a move towards joint underwrites between banks that have nurtured a close (albeit competitive) relationship looking at similar assets with similar pricing. These relationships are likely to result in swifter deal execution and generally smoother transaction execution than a more diverse club/syndicated deal. ING and LBBW have such a developed existing relationship. They compete on similar deals but also work collaboratively together on big-ticket financings.

A previous example would of course be the Sea Containers House £325 million term financing in the spring of 2015 (jointly underwritten by ING and LBBW). They say keep your friends close and your enemies (and competitors) closer. That has certainly been the case in the real estate financing underwriting world over the last few years.

So for all of the above reasons, for investors sitting on the right real estate assets with financing put in place within the last two or three years, the first quarter of 2016 might have been a very good time to refinance. By the time this article is published, the British electorate will have decided whether to stay in or move out of the EU, which will at least have removed the uncertainty which seems to have had such a significant effect on the real estate finance markets in 2016.

We shall now see whether, and to what extent, that new-found certainty impacts the markets for the rest of 2016.