A widening range of lenders are returning to debt origination in Spain, writes Lauren Parr
Spain’s debt market is returning to health, supported by stronger investor activity, confidence in the economy and attractive risk-adjusted returns. Liquidity for good-quality property has increased in recent months; there are more lenders and the cost of finance has become considerably cheaper.
New players like Blackstone’s US-listed mortgage trust have followed clients into the market, while commercial banks such as ING Real Estate Finance, a few pfandbrief banks including Aareal, and alternative lenders like AXA have arrived or made a return.
Investment banks Goldman Sachs and Deutsche Bank, among the first to enter Spain during its recovery, have deployed balance-sheet capital this year while a few healthy domestic banks, namely Banco Santander, Banco Popular, BBVA, Sabadell and La Caixa, are starting to lend, mainly in smaller deals for domestic clients.
“First came the Americans at very high, 400-500 basis point margins and moderate loan-to-value ratios [typically up to 60%]
in the second half of last year,” says one Spanish banker. “Competition is increasingly significant among all lenders and margins have fallen to 250-300bps for the same LTV ratios.”
But it has been a gradual turnabout, with lending still conservative despite signs of overheating in parts of the equity market.
“Before summer 2013 it was very quiet and there were few deals, with very little debt available,” says Mike Shields, ING REF’s head of Western Europe, the UK, USA and structured products. “After that summer US opportunity, value-added and hedge funds became active, some big foreign banks began selling parts of loan books and Sareb was formed.”
ING has been tracking new financing opportunities in Spain for a year but has seen fewer of them than it had expected – a view the investment banks share.
Equity deals drive market
One reason for this is that pure equity deals still drive the market, with a lot of real estate secured by new Spanish REITs such as Lar España, Hispania, and Merlin Properties. These blind-pool vehicles need to deploy cash to avoid negative carry, so do not apply debt at the outset. Also, the type of prime assets international lenders in particular are chasing remain scarce.
However, traction has been building throughout this year, with ING on the cusp of closing two financings in Spain: a €40m loan and another well over €100m.
One very large financing mandate has yet to be awarded: for Project Hercules, secured against around €6.4bn of residential loans Blackstone bought from Catalunya Banc for €3.6bn in July.
“You’re not going to capture outsized returns based on an extreme lack of funding, as was the case one year ago,” says Andrea Bora, head of Goldman Sachs’ EMEA real estate finance syndicate desk.
“The opportunities are now more normal; real estate investment volumes are very low by past standards and it’s a natural evolution for investment to grow. There will be a bigger pie, with more people sharing it.”
Domestic institutions are finally starting to lend again, having cleaned up their balance sheets and are focusing on returning money to shareholders, the Spanish banker says.
Dynamism will come from German banks putting Spain back on their ‘permitted’ list in search of bigger returns outside their home market, says Bora.
Aareal recently teamed up with a local lender to provide €106.7m of a €160m loan for existing client La Sociedad General Inmobiliaria, secured against the 45,000m2 Plaza Norte 2 shopping centre in Madrid. The deal was the German bank’s biggest financing in Spain for several years and also demonstrated Spanish banks starting to work on lot sizes larger than €15m-35m.
“The entry of new lenders into the Spanish real estate market is increasing,” says Deutsche Bank director Roman Kogan. However, it is still possible to get a higher return from an equivalent real estate risk in terms of LTV ratios and product quality than it is in Germany, France and more recently, the Netherlands.
There has been significant growth from just a few lenders one year ago to up to 15 for really good assets, but competition is still far lower than in other markets.
A major factor convincing banks that the time is right to lend in Spain is the fact that “lenders are feeling more optimistic about Spain’s economy and the liquidity available in the real estate market”, says Kogan.
The country has taken big steps towards reform and the economy is well-positioned for recovery, with very high unemployment starting to fall and GDP growth forecasts for 2014 now above the 1.2% eurozone average, says Michael Haddock, CBRE’s head of EMEA capital markets research.
Lenders also believe Spain is stable at the bottom of the cycle, which makes it “easier than dealing even in London where we’re seeing huge rental growth”, says ING REF’s Shields.
“What’s great about Spain now is that if you look at the performance of assets in the past six years, you can’t come up with a worse scenario in the context of the Euro crisis and 25% unemployment. So if an asset has consistently had 95% occupancy and stable rents, you know it’s going to be a winner.”
Having found value in Spain, lenders have a better handle on loan-to-value levels going into a deal, and with stabilised cash flows, Shields considers it “an excellent risk/return play with more upside potential than downside risk”.
DB is one of foreign drivers on recovery road
International banks are responsible for the biggest Spanish deals (€50m upwards) and are focused on direct lending to dominant assets with robust cash flows.
“We’re doing moderate-leverage deals on relatively stable, quality assets,” says Deutsche Bank director Roman Kogan. It looks for well-located properties with very stable occupancy and likes asset management initiatives that can provide upside.
For offices, it looks only at Madrid and Barcelona, but for retail can be more geographically diverse, providing the asset has a good catchment area and stable performance; “things that have not been too volatile in terms of cash flow”, Kogan says.
The bank has financed two deals this year (see table below): a circa €100m loan for seven well-positioned shopping centres and a retail park for GreenOak Real Estate and Grupo Lar; and finance for prime central Madrid office building Castellana 200, which requires “some asset management initiatives”, for a partnership between a local private equity fund and an international investor.
Deutsche Bank is looking to underwrite loans secured by Spanish collateral for CMBS execution in 2015, a product for which it sees demand.
With more deals expected from Sareb and other Spanish banks, there is a lot of financing to be done. But in an interesting trend, Kogan says he has seen more Italian than Spanish enquiries from a lending perspective.