Growing pack of lenders climbs risk curve to fund repriced regional assets, writes Lauren Parr
Property financing in the regions is slowly opening up and more activity is expected next year as investors and lenders seek better value outside London.
“The financing response has been as healthy as investor appetite,” says CLS Holdings chief executive Richard Tice. “Well- funded investors are looking at the regions for value relative to what they find in London, in a shift from nine or 12 months ago.”
As the buyer of Project Neo, 34 short- leased government-occupied buildings, Tice’s impression is based on recent experience. The bidding process for the regional assets in receivership went to three rounds and drew a number of credible players including Kennedy Wilson, Cerberus and Lone Star. CLS paid £118.6m cash and is talking to lenders about adding medium-term finance.
“There has been a gradual improvement among the main clearing banks – that has to be good for the markets,” Tice says. “You would not have been able to fund this with a UK clearer 12 months ago.”
Regional values have fallen 45-50% from the peak, meaning lenders can gain from higher margins and lower values. Across the UK, De Montfort University estimates a total refinancing requirement of about £120bn before the end of 2015.
RBS, Lloyds, Santander and HSBC are active. “Banks are going up the risk curve since core lending competition is intense and margins have fallen,” says Chris Holmes, Jones Lang LaSalle’s new UK head of debt.
Weight of money compresses margins
“It’s not just banks that are keen to lend,” says Tice. “There are insurers and bond markets, where a huge amount of money is trying to find a home. There are an increasing number of lenders and with the weight of money people need to lend, margins have fallen 50-100bps from 9-12 months ago.”
Paul Coates, RBS’s managing director of real estate finance, also reports “a rise in equity and mezzanine capital prepared to invest in the regions”. Debt funds are looking outside London, partly because they need to focus on higher-yielding deals to hit the returns they have promised investors. Borrowers often need mezzanine lenders to step in to get deals done.
Europa Capital’s mezzanine fund has made its first loan, a £35m mezzanine tranche of the £175m whole loan Barclays provided last month for Oaktree’s and Patrizia’s purchase of the IQ Winnersh business park, Reading.
According to Costar, the senior debt was priced at around 220bps and the mezzanine at around a 6% internal rate of return. ING and RBS had offered separate senior facilities, Deutsche Bank and Blackstone Real Estate Debt Strategies offered whole-loan terms and BAWAG and LaSalle tendered mezzanine.
But banks’ criteria remain selective. They often focus on cashflow and the impression is that neither Lloyds nor RBS have been able to lend as much in the regions so far this year as they had hoped. “There is constraint in the depth and strength of liquidity in the regions,” admits Marty Green, Lloyds’ head of mid-markets.
Lloyds’ mid-markets team, which makes £10m-plus loans, has completed six North and Midlands deals this year, totalling £200m, two thirds for new clients and some development-related. The whole mid-markets team will write £1bn of new business this year and had appetite for up to £1.7bn, “had market circumstances presented”, he says.
The SME team declined to give a figure but head of property Graham McKean reports 14% growth in the Midlands and North. Another senior UK banker sees more activity in the next year, but warns of market dislocation. “RBS and Lloyds still carry significant non-core regional assets. The regions are stepping forward, but at nothing like the speed of London. Damage done to capital bases in the regions takes time to heal.”
RBS has 15 northern deals closing or in the pipeline and is pushing to increase deal flow in the Midlands and south. In the first nine months of the year it wrote around £460m of new loans in the regions, a third of them to new clients. This month the bank provided a £28m, five-year whole loan for Moorfield’s & Oaktree’s joint venture purchase of 100 Barbirolli Square in central Manchester. Deutsche Pfandbriefbank and Santander were among the underbidders.
‘Flight to quality’ will increase capital flow
Development remains patchy and a lot of money is still bypassing the regions, says the banker. More capital will flow next year, says Green – a mixture of new development opportunities, as supply is tight, and ‘flight-to-quality’ opportunities. In addition, a lot of work-out assets could be unlocked.
The likes of Kennedy Wilson and Cerberus are starting to market assets from early non- performing loan portfolios they bought, while IBRC borrowers trying to refinance should create opportunities. “We’re seeing more enquiries from borrowers that had waited to see if they could negotiate discounts on repayments,” says Trevor Homes, responsible for senior lending at ICG-Longbow.
Longbow has lent across the UK since its launch seven years ago, initially mezzanine, and now for both its £100m quoted senior debt fund and a £700m whole loan fund.
Homes agrees they face “a bit more competition in the regions, but it’s patchy”. The fund has scored deals that wouldn’t fit banks’ model: on one it has terms out on, a bank offered a far cheaper margin of around 200bps, but wanted heavy amortisation, while Longbow would prefer free cash flow to be reinvested in the properties.
Tice says, at the end of the day, the key issue is not whether an asset is in the regions. “Quality of covenant clearly helps as lenders go into the regions. They focus on a certain duration of income and the probability of renewing or re-letting, then the loan term relative to the quality of the income.”