Chinese banks are blazing a trail in commercial real estate lending, reports Jane Roberts
A recent £185 million injection of senior debt capital for The O2 from Lloyds will help develop a designer outlet retail centre at the iconic London concert venue.
Writing a loan with an element of speculative development finance works for the UK clearing bank in this case, because its facility is supported by income from existing tenants trading in the former Millennium Dome. But one even more eye-catching aspect of the deal for followers of Europe’s commercial property lending market, is that Lloyds has syndicated half the debt to Industrial and Commercial Bank of China, in the latest example of a Chinese bank backing a non-Asian sponsor.
The gush of cross-border equity capital flowing from Asia into Europe’s property markets has been a hot topic in recent times. Real Capital Analytics logged almost 70 investments of over €100 million in the 15 months to March 2016 that were made by Asian buyers. However, the growing role Asian banks are playing in the European lending markets is a rather less well-known phenomenon.
These banks have supported domestic clients in their forays overseas with relationship-driven bilateral loans in the past, and activity has been picking up in line with the increasing volume of transactions by Asian buyers. A notable example last year was Sumitomo Mitsui Trust Bank (SMTB) and Sumitomo Mitsui Banking Corporation (SMBC) providing £350 million of partly speculative development finance for Mitsui Fudosan’s redevelopment of the BBC site at White City in London.
An even newer trend is the shot of additional liquidity injected into the debt markets over the last 12 to 24 months by Japanese, Chinese and other Asian banks as they have become repeat participants in clubs and syndications arranged by European and US banks. And as the Asian lenders take part in more deals and become more knowledgeable about the market, they are extending their balance sheets to new sponsors.
“Some Asian lenders do like to invest with their own clients, such as south Asian investors who are buying in the UK,” says Ab Shome, a director in distribution in Lloyds corporate real estate banking. “Others, like the Japanese banks, are pretty open to other sponsors and kinds of deals.”
“We are seeing more and more Asian banks active not just in the UK but in other European deals,” agrees the London-based director of CRE debt distribution at a US investment bank. “Some of the larger banks worldwide are active here, banks from across the region, from mainland China, from Hong Kong, from Singapore. The Japanese have been very active.”
Although many do start off initially lending only in London, and usually against central London offices, some Asian banks are participating in an increasingly wide range of deals, backing other kinds of assets and venturing outside the UK capital.
“Asia provides appetite to finance all the way through from the super-prime, high-end assets up to higher spreads. Japanese banks like trophy assets, take spreads in the low 100s, while some of the other institutions will participate all the way up to the mid 200s, for UK regional deals for example,” the investment banker says.
One Japanese bank differs
Not all Japanese banks are the same and Aozora stands out as being different from its peers in that it looks to earn higher returns in all the business it does. The institution, which was once known as Nippon Credit Bank before being restructured after the financial crisis, opened an office in London last year and has a real estate pedigree. It took a participation in a Citibank loan to Greystar secured on London student housing asset, Assam Place, and Morgan Stanley is said to have sold the Japanese bank a slice in the refinancing of the Adelphi office building in the capital (see table, page 14).
Most of the active Japanese banks doing secured lending, however, do target top quality, income-producing assets and with their very low cost of funding relative to other banks, have helped to support some of the most tightly priced deals of the last two years where the arranging banks would not necessarily want to keep large, lower-yielding final participations. Shinsei Bank, and both SuMi banks, SMTB and SMBC, all went into the club that ING put together to finance London’s ‘Gherkin’ tower last year, which priced at 120 basis points, one of the tightest margins this cycle.
SMTB has a book of 17 loans currently in the UK, totalling about £838 million and all secured on central London property, mainly offices. Shinsei, in the market for barely 18 months, has built a UK book of circa 10 loans, all in London offices so far. It likes participations of around £40 million. SMBC does go out of London, taking part in last year’s refinancing of Liverpool One shopping centre at 130 bps for Grosvenor. Head of real estate finance and securitisation investment Robert Carney told Real Estate Capital that the bank would also do more development if it was sufficiently de-risked and had a strong sponsor.
Back before the financial crisis, banks which queued up to buy into syndications arranged by investment banks were often dismissively referred to as ‘stuffees’ and were sold deals with a margin skim. But today, the returning Japanese banks are being very strategic, aware amongst other things of their potential ability to influence market pricing because they could lend more cheaply than any European bank.
One Japanese lender, which returned to lending in the UK in 2013, is adamant they are not interested in leading the market down. He says Japanese banks like to work in partnership with an arranger and if possible to be involved from the beginning of the deal, in a club. “We pay a fee but we don’t take skimmed margins, we take the underwritten price. That way we are not driving pricing down.”
Japanese banks don’t have big overseas real estate teams which makes lending in different European jurisdictions challenging. But several are said to be considering a move into US lending during 2016.
Chinese banks a force
Hot on the heels of the returning Japanese banks are a number of Chinese banks, which in less than two years have become a force in the market.
At their head is Bank of China which has taken the largest tickets of any Asian bank in European loans, often in support of relationship clients. With branches in many parts of Europe, including Germany, Luxembourg, the Netherlands, Scandanavia, Italy and Spain as well as the UK, it is rapidly becoming a sophisticated lender to multiple markets.
BoC was involved in two of the biggest European real estate secured financings last year. Both were acquisition loans, one for the ‘Celsius’ portfolio of 12 French and Belgian shopping centres and the other, for Potsdamer Platz in Berlin.
Celsius’s buyers were Chinese sovereign wealth fund China Investment Corporation and AEW Europe backed by a €670 million loan provided by ING and Natixis. The two underwriting banks and CIC brought in Bank of China as joint mandated lead arranger with a participation of more than €200 million. They syndicated a further €100 million, half of that to another Chinese lender, China Construction Bank.
The €800 million Potsdammer Platz loan was underwritten by HSBC for Brookfield Property Partners’ €1.3 billion purchase of the 260,000 sq m mixed-use estate in the German capital. Again, an Asian investor was involved as Brookfield tied up a joint venture with Korean Investment Corporation, South Korea’s sovereign wealth fund. Bank of China’s ticket is likely to have been a large one of circa €200 million, alongside three German banks: Berlin Sparkasse, Helaba and pbb Deutsche Pfandbriefbank.
Industrial & Commercial Bank of China (ICBC), which participated in the O2 loan, has also been active, and its sweet spot is loans up to £100 million. O2 is the first deal it has publicised and, says Andrew Day, head of commercial property at the bank, “demonstrates our continued commitment to the UK real estate market.” After launching in the UK in 2013, the bank has 20 loans on its property book, and lends across the UK – it was one of the participating banks in last year’s syndication of the debt secured on MediaCity, the BBC’s regional headquarters in Salford.
Others Chinese banks on the scene include China Construction Bank, which has invested in several other French loans as well as the Celsius deal. “Chinese banks have been growing in all sorts of corners of Europe,” says one underwriting banker. “Bank of China has also done deals in Italy, Poland, they are trail-blazing. One new trend is that now the main Chinese banks are increasingly hard-nosed about leading upfront rather than taking participations; they want to come into clubs jointly and even participate in the distribution.”
Hong Kong-headquartered Bank of East Asia is a lender to SME relationship clients and has branches in Manchester and Birmingham as well as London. Agricultural Bank of China may become more active. Chang Hwa Commercial Bank participated in the unsecured corporate facility in April last year for Hammerson; Bank of China has also been in the syndicates providing corporate faciities in 2015 for Land Securities and British Land – while Japanese banks UFJ and Bank of Tokyo-Mitsubishi were in the Hammerson and British Land syndicates.
Taiwanese banks “like smaller tickets, trying to back small-medium sized sponsors for either development or acquisitions,” observes one market participant. Indian banks set up to offer commercial mortgages like ICICI and State Bank of India “tend to work for relationship clients and have their own balance sheet to do bilateral loans. They can also be quite expensive and tend to focus on central London; you don’t see them in syndications much,” he says.
Mezzanine lending is the preferred part of the capital stack for Korean institutions says a US banker. “More often they will work with investment banks.They are more opportunistic, come in clubs and look for high senior in the mid 300s or mezzanine.”
Singapore’s United Overseas Bank is an experienced lender against property in Europe to relationship clients. Development Bank of Singapore took a participation in HSBC’s underwrite for Temasek and Oxford Properties of MidCity Place.
Last year was a bumper year for distribution deals with Asian banks, especially in the very busy second half, and though this year has begun more quietly their continued commitment isn’t in doubt. “First you had the German banks coming back lending five, six years ago. Then the debt funds started to lend, and they were super-helpful. Then you had the UK banks that have come back into lending, like RBS and Lloyds,” says the director at the US investment bank. “Now you have the next wave which is the Asian banks which adds that additional layer of liquidity. It really is helpful, not just for the financing market but also for the wider CRE market in general.”
Heightened risk and ‘Brexit’ depress syndication activity in “more difficult” 2016
So far this year, syndication activity seems to be down, particularly in the UK where June’s vote on European Union membership looms. “There is a bit of a hiatus, because of Brexit and we have not seen the continuation of last year’s level of activity,” says one bank’s head of real estate syndication.
Helaba’s head of distribution Norbert Kellner agrees that the uncertainty around Brexit is impacting sentiment. “The impact on the syndication market is that people are concentrating again on bilateral deals and on their key relationships. So if they only have one shot rather than two, that’s what they’ll focus on. Or people are thinking about clubs. So the syndication market is difficult now or at least it’s rather tough to get things done. It’s not really a perfect market at the moment.” Debt pricing has also risen.
Investment transaction volumes have been lower in the first quarter. “There have been fewer deals to finance. Therefore, the ones that have come to the market have got a pretty good reception,” says another banker. “You still have substantial bids from local banks and debt funds and we’re not seeing appetite from Asians to finance wane. We’re not seeing them put anything on hold.”
“The investment case for real estate is still valid,” says another. “But the pipeline is lower and not only in the UK. People are re-assessing whether the world is a bit more risky.”
Click here to view a table of recent Asian lending deals in Europe.