Market leaders stay resolute

Real Estate Capital’s Top 40 European Lenders shows that the most active in the sector intend to stay the course, but the lending game has become more challenging, writes Daniel Cunningham

Two things are apparent from the latest edition of Real Estate Capital’s Top 40 European Lenders; firstly, the European property sector continues to be served by a diverse mix of lenders, and secondly, the make-up of the leading pack has remained relatively constant in recent years.

In terms of diversity, the roll-call includes banks headquartered in Germany (eight), the US (six), the UK (four), France (three), and elsewhere in Europe (four). Institutional investors include four US-based insurers and four from the UK and continental Europe. Completing the list are the debt fund managers; four from the UK and three with US parentage.

It is a far more mixed picture than before the Global Financial Crisis, but the backbone of the Top 40 has remained largely unchanged in the three years since the report was launched. The leading group comprises banks which traditionally financed real estate and successfully returned to the market post-crisis, plus those non-banks which stole an early march in the recovery years and established lending platforms.

In recent years, there has been much talk of new entrants coming into the market (more of which later). However, the most pressing question, amid uncertain market conditions, is whether all those considered to be the established lenders will maintain their level of activity.

A testing year

There can be no doubt that property lending has become more difficult in 2016. The shock of the UK’s EU referendum result in June plunged a key market into uncertainty. Prime investment deals became a rarity and lenders were left to ponder whether loans written today would have a vastly different loan-to-value tomorrow if capital values dropped.

Continental Europe remained a relatively strong market, although it too has issues. Macro-economic and political factors have given investors and lenders pause for thought, while negative interest rates and increased regulation have put pressure on the German banks especially.

The organisations profiled in the preceding pages each have established real estate finance teams and clear lending strategies. The key question facing the industry though is whether market conditions will force them to dial down their activity.

For instance, refinancing activity has remained strong, while demand for large-scale acquisition finance has been less so. Investment banks thrive on backing big-ticket investments by large investors which need to close deals quickly. The investment banks we spoke to remain committed to the market, but it is clearly more difficult to source deals.

Shifts in market pricing have also made distribution tricky.

There is also talk in the industry of some insurance company lenders being less active. As for the debt funds offering mezzanine-type money, the fact that many have deployed much of their capital and are at the stage where they need to raise funds afresh might dovetail nicely with the fact that there are fewer high-leverage deals out there to finance.

The fact is that all major players remain outwardly open for business. Many emphasised their aim to diversify the debt products they offer in order to meet demand. The leading lenders clearly intend to stick with the real estate industry, but investors’ activity levels will ultimately determine their success.

The emerging lenders

Despite choppy market conditions, new entrants continue to make inroads into the European real estate finance market with a variety of strategies. Perhaps most notable are the Asian banks.

Some of China’s largest banks have taken part in major syndicated deals in the last year. A prime example is ICBC (Industrial and Commercial Bank of China) taking a 50 percent slice of Lloyds’ O2 arena financing in London. The same bank participated in the Wells Fargo-led development loan for Brookfield’s 100 Bishopsgate development in London this summer. China Construction Bank has also bought into syndications and Bank of China is perhaps the most active of the Chinese banks, following Asian clients into Europe and prepared to write large loans.

Other Asian banks have increased their European lending exposure, including Singaporean and Japanese players, although the latter have been quieter this year. While the major Asian banks have so far concentrated their European real estate investment on syndicated deals, some claim that they are seeking more control in deals as they become more experienced in the market and desire the prestige of leading financings.

Within continental Europe, there is also evidence of banks aiming to step up commercial property lending, several having deleveraged debt piles amassed before the Global Financial Crisis. Spanish and Italian banks have displayed an appetite to provide property finance within their domestic borders.

In Spain, domestic banks are reported to be eager to gain exposure to prime real estate financings. Santander is featured in the Top 40, while Bankinter, La Caixa and Sabadell are all said to be in the market, although large-ticket real estate financings remain relatively rare in Spain.

Bankia, Bankinter and La Caixa all bought into ING’s €210 million financing of the Torre Espacio in Madrid for the Filipino investor Andrew Tan, which was written in February.

Italy’s domestic banks are also active. In July, Unicredit and Banca IMI joined ING and BNP Paribas in a €216 million financing of fledgling domestic REIT Coima RES’s purchase of three buildings occupied by Vodafone in Milan. UBI Banca joined ING and another French bank, Credit Agricole, in July’s €100 million financing of TH Real Estate’s Castel Romano outlet mall in Rome.

Alternative lenders

Aside from the banks listed in the Top 40, several international banks such as South Africa’s Investec Structured Property Finance, Australia’s Macquarie, and Royal Bank of Canada provide real estate finance from their London offices.

In addition, several institutional players are providing property finance out of London. Among them are the likes of Cornerstone Real Estate Advisors, now merged by US insurance parent MassMutual under the Barings brand, Hermes Real Estate, the investment management arm of the BT Pension Fund, and Canada Life Investments.

Also predominantly based in the UK capital are a significant number of non-bank lenders with strategies pitched at a variety of market niches. Among them are Cheyne Capital, which does high leveraged loans across Europe, and Venn Finance, a boutique fund manager which is growing its business including a UK government-backed private rented sector (PRS) scheme, a Dutch home mortgages platform and a third party debt fund. Other firms that have made an impact include Cain Hoy, a subsidiary of New York-based Guggenheim Partners, which has proved itself willing to invest in real estate through either the equity or debt route.

The smaller-scale end of the market is also served by alternative lenders. Aeriance Investment targets regional UK deals, for instance, while Pluto Finance provides residential development loans and Fortwell Capital, a subsidiary of Christian Candy’s CPC Group, is among the growing number of firms offering bridging finance to high-value developments.

One deal this year demonstrated that the real estate market attracts debt capital from unlikely sources. In May, Real Estate Capital revealed that developer Almacantar had sourced a whole loan of up to £400 million for its Marble Arch Place development in London. The lender was identified as The Children’s Investment Fund; a low profile New York hedge fund which has backed development in its home city and which was making its UK debut.

It will be fascinating to see whether, come next year, any of the emerging players have broken into the Top 40 and whether any have dropped out.