REC Decade: Through the archives – 2011 to 2014

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

2011: Finance 2.0

CMBS made a faltering comeback, lending stepped up and regulators turned the screw.

Chiswick Park

In June 2011, European CMBS made a comeback – although, ultimately, it would not herald a permanent return. Deutsche Bank closed the first publicly traded commercial property securitisation since the crisis, secured on Blackstone’s Chiswick Park in London. There was demand, even if investors did not beat down the door.

The debate about how ‘CMBS 2.0’ should look took centre stage. The wisdom of features such as Class X notes, junior debt outside securitisations which made control hard to work out, and pools with dozens of loans with different loan triggers were questioned. In April, the Commercial Real Estate Finance Council (CREFC) Europe set up a committee to make proposals on how a relaunched market should look.

Meanwhile, INREV’s investor intentions survey at the beginning of the year showed that 50 percent of institutional investors thought debt funds were an investment option, while 39 percent were prepared to consider mezzanine.

In the senior space, German insurance giant Allianz prepared to make its debut in real estate lending in March with a senior loan, joining other insurers including MetLife and AXA in the market. Lenders polled by the Property Banking Forum’s first UK Lending Intentions Survey vowed to increase senior debt origination in 2011, while a string of large deals were closed over the summer, including a €219 million loan by Aareal and Helaba to Rockspring for a shopping mall in Paris.

In the loan sales market, Real Estate Capital estimated late in the year that European banks had brought debt portfolios worth at least £10bn (€11.5bn) to the market in the last six months.

A landmark deal closed in December, as Royal Bank of Scotland and Blackstone closed the £1.36 billion Project Isobel, which created a joint venture to work out a major slew of RBS’s legacy real estate loans. It was followed by Lone Star’s purchase of Project Royal, a major loan sale which kicked off Lloyds’ real estate deleveraging.

Meanwhile, regulators turned up the pressure on the banks. The UK’s Financial Services Authority forced banks to reassess the riskiness of their commercial real estate loan books or use its ‘slotting’ rules, as the Bank of England questioned banks’ internal models for calculating credit risk.

2011 timeline:

February: Blackstone and Pramerica step up mezzanine with the launch of debt funds.

March: Club of banks finances Westfield’s Stratford mall with a huge loan.

May: Deutsche Bank issues Chiswick Park CMBS.

July: EU approves bail-out and new business model for Germany’s Hypo Real Estate.

December: RBS and Blackstone agree to Project Isobel deal.


2012: The great deleveraging

US private equity firms mopped up some of the distressed debt portfolios put on the market by Europe’s banks, while alternative lenders increased their lending capacity.

European banks began to get to grips with the piles of toxic debt clogging up their balance sheets, with non-performing loan portfolios put out to the market. The big US opportunity funds – Blackstone, Cerberus and Lone Star among them – limbered up to take advantage.

Across two deals, Lone Star bought the legacy Lehman Brothers property debt portfolio known as Project Excalibur from Germany’s Bundesbank, including CMBS notes and debt in collateralised debt obligations.

In the UK, Lloyds sold the £625 million Project Harrogate loan portfolio to Oaktree in May at an almost 60 percent discount to face value. In June, the bank sold its €360 million Project Prince Irish loan portfolio to Deutsche Bank and Kennedy Wilson, with a €2 billion Irish loan book – Project Pittlane – subsequently marketed.

As the great unwinding of Europe’s toxic property debt began in earnest, the restructuring advisory sector grew with the likes of LNR Partners and Capita planning to expand beyond servicing and asset management in Europe, to work with banks and debt investors.

New bank debt remained a rarity. To stretch their lending capacity, banks sought alternative partners – with insurers and private equity firms increasingly active in the space. Among the non-bank lending deals, M&G Investments provided £266 million to fund Round Hill Capital’s Nido business in May.

In the CMBS market, Standard & Poor’s reported in January that a record €37.4 billion of securitised European loans were to fall due in 2012 and 2013. Meanwhile, CREFC Europe launched its CMBS 2.0 guidelines in July to promote “simple structures, transparency and increased confidence among investors”, according to Brookland Partners’ Nassar Hussain, who chaired the committee.

2012 timeline:

January: Deutsche Bank closes second post-crisis CMBS, the £210 million securitisation of the Merry Hill mall in Birmingham.

April: Patron and TPG beat Valad Europe to take on Dutch Uni-Invest portfolio.

May: Lloyds sells its £625 million Project Harrogate UK NPL portfolio to Oaktree.

July: CREFC launches blueprint for revival of CMBS market.

November: Deutsche Annington persuades investors to back its restructuring proposals for the €4.3 billion GRAND CMBS.


2013: Lending appetite returns

Real estate funds rediscovered their taste for risk, turning their attention to distressed assets that were now hitting the market. 

During 2013, the sentiment towards European real estate became more positive, as the recovery got under way. During the year, lenders demonstrated an increased appetite to write new property debt. There were signs that the UK senior debt distribution market was picking up, with large loan syndications completed and investment banks underwriting loans to generate fees through distributing the debt, while recycling capital for new financings.

The Editor’s Letter in May reflected this new optimism: “Finally, there are signs that the Ice Age that has enveloped the debt market since the 2008 financial crisis is starting to thaw.”

For Europe-focused real estate private equity, property funds became more ‘risk-on’, as the holders of distressed assets became more willing sellers. Assets were expected to come to market as the banks improved their performances, allowing them to start to write down the value of loans on balance sheet and sell at the sort of prices the funds wanted to pay.

As property values remained depressed, sellers ditched the ‘pretend and extend’ strategy and put distressed assets on the market.

Spain drew attention, following the late 2012 creation of ‘bad bank’ SAREB and as Spanish banks became more proactive.

As the year went by, UK, Irish and Spanish banks put portfolios on the market, including three from Lloyds, a further three from Irish banks or bad banks and two from SAREB.

2013 timeline:

February: Toys R Us refinances the debt secured on its UK portfolio with a CMBS refinancing.

March: Blackstone’s second BREDS fund nears $1.5 billion closing.

June: Germany’s Gagfah issues largest new CMBS since the financial crisis with €2 billion multi-family transaction.

November: Pramerica – now PGIM Real Estate – pulls in €820 million for its fourth junior debt fund.


2014: Debt gets cheap

As real estate lending competition increased, margins crept down across European markets.

For European real estate, 2014 was a year of recovery. In the UK, the annual total return at the all-property level was heralded as the strongest for a quarter of a decade. Ireland was a stand-out recovery story, and Spain became interesting.

In November, Real Estate Capital broke the news that Canadian property giant Brookfield and Qatar Holdings were preparing a “stunning bid” for Songbird Estates, to gain control over Canary Wharf’s £6.28 billion portfolio; which eventually led to one of the largest deals in UK real estate history with a £2.6 billion deal in April 2015. It was also a sign of global investors’ appetite for Europe’s best property.

The real estate recovery and increased lender competition for deals led to margin compression at an unprecedented rate. As it became clear that interest rates would be lower for longer, and as loan pricing came in, borrowers took the opportunity to refinance their debt.

Across the market, lending deals came thick and fast, including Bank of America Merrill Lynch’s April loan of €935 million to fund Lone Star’s purchase of Coeur Defense in Paris. Whereas £100 million had been considered a big ticket in the previous year, £300 million-upwards was now considered within several lenders’ capabilities.

Loan sales continued throughout 2014 and by the summer, several large Spanish loan deals were underway including from SAREB and Bankia.

Regulation remained a major talking point as the industry responded to the Investment Property Forum-sponsored A Vision for Real Estate Finance in the UK report, which suggested that there be a requirement for lending linked to property’s long-term sustainable LTV, rather than open-market value. A further recommendation was for the UK to have a loan-level national lender database.

2014 timeline:

January: Noteholders vote to replace Hatfield Philips with Mount Street on Windermere XIV CMBS, the first transfer of a master servicing contract.

February: Real Estate Capital is sold to PEI Media.

April: BAML lends €935 million to Lone Star for Coeur Defense, Paris.

June: Goldman Sachs closes its second Broad Street Credit Real Estate Partners fund on $1.8 billion.

October: ECB’s asset quality review reveals capital shortfall of €25 billion at 25 banks.

November: Real Estate Capital reveals Brookfield and Qatar Holdings’ bid for Songbird Estates.

A look-back through the 2011 to 2014 archives will follow on 5 October.