REC Decade: Through the archives – 2007 to 2010

As Real Estate Capital celebrates its 10th anniversary covering Europe’s real estate finance markets, we take a look back through the archives.

2007: At the peak

Property boomed as vast volumes of capital flooded into the market, but trouble was brewing.

“In a slowing market, lenders should persevere with vigilance”. That was the ominous headline of the leader by this publication’s then editor Jane Roberts in the June 2007 edition.

Following a bull-run for property, and its financiers, there were signs that 2006 might have been the peak. The annual De Montfort University report had shown that the rate of growth of outstanding debt had slowed in 2006. Rising interest rates and widening yields promoted investors to ease off the gas.

At the annual Financing Property gathering, Savills’ William Newsom gave his assessment: Carry on lending but be vigilant. Understand the risk, the fundamentals and the forward view. And if in doubt, don’t lend.

Leading into 2007, the finance behind real estate had become liquid and complex. The market for publicly traded CMBS was huge, REIT legislation had created a new route for equity, and property derivatives was a booming business. The real estate funds sector was also at its peak; Property Funds Research had in its database 830 European funds, which had raised more than €400bn of capital.

Things were to change dramatically. In August, came the credit crunch, signalling disaster for financial markets. The scale of property’s debt bubble would soon become apparent.

2007 timeline:

February: Deutsche Bank issues £672 million CMBS backed by Tesco and Merry Hill, while UK propco Bruntwood opts for a £900 million securitisation.

March: A Middle Eastern syndicate pays £200 million to buy the City of London’s proposed tallest tower – the 945 foot Pinnacle, a scheme which would ultimately stall.

June: Hypo Real Estate and Credit Suisse win the financing mandate for The Shard in London.

August: BNP Paribas announces that it is freezing the assets of hedge funds exposed to the US subprime mortgage market. The ‘credit crunch’ begins.

September: Northern Rock given UK state financial aid after a run on the bank.


2008: The crisis hits

The collapse of Lehman Brothers sent shock waves around the world, but European real estate was already reeling.

The year that brought us the collapse of Lehman Brothers did not begin well for European real estate finance.

The ‘deep freeze’ gripping the CMBS market led to a wave of redundancies within the investment banks’ real estate structured finance teams. An estimated €40 billion to €50 billion of ‘hung’ loans sat on balance sheets at the start of the year.

In the early months of the year, there was talk in the market of banks setting up ‘acquisition finance’ teams to selectively originate loans at the higher margins the market offered, or to acquire loans from other lenders. In March, ING snapped up €500 million of distressed inventory from investment banks, which had been intended for CMBS.

At MIPIM, news broke of Bear Stearns’ extraordinary collapse.

Non-bank debt funds began to be raised to take advantage of the situation. Prudential M&G set up a €1 billion mezzanine fund as others, including Starwood, set out to raise capital.

Similarly, in the investment market, private equity groups, including The Carlyle Group and MGPA, closed funds intended to take advantage of the fall in property prices.

The dramatic 14 September bankruptcy of Lehman Brothers – blamed on its exposure to bad property deals – sparked a fresh contraction of European real estate debt markets. By September, UBS and JPMorgan had become the latest large banks to pull back from property lending.

In October, Hypo Real Estate’s earlier rescue by the German government had a knock-on effect in Germany’s Pfandbrief mortgage bond market. The bank froze its lending in a bid to cut its loan book by 20 percent.

By the end of the year, the market was almost at a halt. “Don’t shoot the messenger, but there’s worse to come in 2009,” was the message from the December Real Estate Capital Editor’s Letter.

2008 timeline:

January: Rock Capital sets up first UK-listed property debt fund.

March: Bear Stearns is revealed to have $33 billion of exposure to global CMBS and the US mortgage market.

September: Lehman Brothers files for bankruptcy.

September: UBS and JPMorgan cease lending as market contracts.

October 2008: Eurohypo plans job cuts in move to scale back lending, while HSH Nordbank applies for aid from €500 million bail-out fund.

December: HBOS takes a £3.3 billion hit on the back of its real estate losses.


2009: The big freeze

During 2009, lending virtually came to a halt, as market players braced themselves for a dramatic fall in property values.

Entering 2009, it was clear to many that property values were way off the bottom. Banks had not even begun to start writing down CRE loans, with Royal Bank of Scotland said in January to have a £51 billion book impaired by a mere 0.2 percent.

Very few banks were lending, although some bucked the trend. Some German banks were in the market, with four clubbing together for a €400 million Paris loan. Some annuity lenders were also quoting on deals, shielded to an extent by less exposure to short-term refinancing risk.

The toxic effect of debt in a plunging market was the story of the year, with indebted property funds and firms fighting for survival, putting the begging bowl out to investors. The property derivatives market faced its first serious setback since launching four years previously, with volumes halving in the first quarter.

Sentiment towards property warmed in the second half of the year, with some fund managers noting a return of equity investors and some renewed momentum seen in the private funds secondary market, led by buyers who believed low or ungeared funds were approaching a trough in values.

In September, the Irish finance minister, Brian Lenihan, announced the newly created National Asset Management Agency would buy €77 billion of loans from five Irish banks for €54 billion; a 30 percent writedown. The price was high, critics said.

2009 timeline:

January: ING axes its four-month-old property derivatives team.

February: AAA bonds face downgrades as stress tests reveal 268 problem CMBS loans.

April: German state starts Hypo Real Estate nationalisation.

June: Default looms for UK’s White Tower CMBS after revaluation halves portfolio value.

July: Lloyds beefs up property work-out team – doubling it to around 400 by year-end.

September: Tesco issues second post-crisis CMBS in £545 million sale-and-leaseback.


2010: The re-emergence

During 2010, former property bankers returned to the market to raise mezzanine funds, as a range of investors took a fresh look at real estate.

Senior property bankers began to re-emerge in 2010 on the debt-buying side. Many who had originated billions of euros of debt for the likes of Barclays Capital and Morgan Stanley that was intended for CMBS exits made their return.

Many had been off the radar since 2008, but with a knowledge of the major debt-driven property deals, some began to surface. As Real Estate Capital wrote at the time: “They know where the bodies are now buried”.

Several mezzanine debt funds sprung up, run by former bankers to provide financing in the higher echelons of the capital stack from where banks had retrenched.

In the equity markets, in a sign of renewed confidence, Real Estate Capital reported in May that two leading UK specialist funds were planning substantial equity-raisings; with London’s WELPUT and the Industrial Property Investment Fund setting out to raise £300 million of capital.

In July, bondholders in one of the highest-profile distressed CMBS deals – the £1.15 billion White Tower – welcomed the level of recoveries achieved by the sale of six of the underlying nine office buildings to Carlyle Group in a sign of recovery in the investment market.

In September, Real Estate Capital reported that Legal & General’s in-house property team was launching a £2 billion push into property – an indication that the insurance sector was reassessing real estate.

2010 timeline:

February: Eurohypo agrees work-out for Uni-Invest CMBS, the first in Europe to default on maturity.

March: AXA seeks €1.5 billion to ramp up real estate lending and debt buying.

June: The Heron Tower in the City of London lands funding from Santander in a club with Deutsche Postbank, HSBC and Investec.

July: White Tower asset sale will pay off bulk of bondholders.

September: pbb Deutsche Pfandbriefbank lands further €40 billion restructuring bail-out.

December: Grosvenor secures £385 million Liverpool One financing.

A look-back through the 2011 to 2014 archives will follow on 3 October.