As Europe’s real estate investment market evolves, banks must provide sponsors the means to fund their strategies, argues Annerie Vreugdenhil, global head of real estate finance at ING.
A result of the sheer weight of equity focused on Europe’s real estate markets is that sponsors need to deploy capital in huge lot sizes. This year, Asian investors – particularly from China and Hong Kong – have been major buyers of prime European property, ranging from standalone trophy assets to pan-continental business platforms.
For those organisations aiming to provide finance to the sector, changing investment trends present a challenge. One of those organisations is Dutch bank ING. The firm’s real estate finance unit operates across European jurisdictions, as well as in Asia, Australia and the USA.
Links to the Asian market were a crucial factor in the bank’s leading role in a £644 million (€730 million) financing of Hong Kong investor CC Land’s purchase of the landmark London office tower known as the ‘Cheesegrater’ – The Leadenhall Building – alongside Bank of China and HSBC in June.
Annerie Vreugdenhil was appointed as global head of real estate finance at the bank in February 2016 and has been with the organisation’s commercial banking business since 1992. Real Estate Capital caught up with her to discuss the changing trends in the market, and how lenders should respond to them.
Real Estate Capital: What do you see as the driving factors in Europe’s real estate finance market today?
Annerie Vreugdenhil: There is generally an abundance of liquidity – debt as well as equity – but a shortage of suitable product. This is partly the reason that the market is reaching the peak, or is at the peak already. However, there is a consensus among many in the market that high capital values and low yields will persist for some time yet, at least as long as interest rates remain low. The underlying European economies are going full throttle, so there are a lot of banks and investors eager to deploy their money, but relatively few owners of real estate who want to sell.
REC: How long do you expect this stage of the cycle to last?
AV: I think the current situation will continue until well into 2018 or even 2019. If [European Central Bank president] Mario Draghi reveals more about the future for quantitative easing, I may change my view on that assessment. The US is ahead of Europe in the real estate cycle. There is a change in the chair of the Federal Reserve coming up, but the economy in the States is performing very well. There is, however, some evidence that real estate values might be coming down slightly in some sub-markets, including San Francisco. That eventually has an effect on the European market.
REC: How is this backdrop driving sponsors’ behaviour?
AV: Sponsors are working hard to find investment opportunities; there’s a lot of investment pressure behind the capital they need to deploy due to the low-interest-rate environment. Therefore, investors are looking at less straightforward ways to find assets, especially with the Asian money coming into Europe in mind-boggling numbers; they won’t look at purchase opportunities below €200 million. That puts pressure on pricing, so some of the Asians are making indirect investments. With so much capital to deploy, demand is changing. They are looking at the asset managers that can handle scale. Spending a couple of billion cannot be done efficiently asset by asset, so platforms are increasingly being targeted.
REC: How does that affect how you as a lender approach potential borrowers to provide finance?
AV: Firstly, we are not just a lender. We are starting to see more M&A activity and investors buying portfolios. We have found that we are giving more and more M&A-type advice to those buying portfolios. Because we recognised that this was happening we are setting up an M&A team within the real estate finance division. Sponsors are starting to behave more like normal corporates, so they are looking for more funding diversification.
For example, they are considering IPOs for platforms and bond market solutions. If they simply went down the route of using the traditional bank-debt method of financing themselves, they would run into the boundaries of what banks can hold from a regulatory point of view. Banks will be affected by Basel IV and because there is a lot happening in the market they need funding diversification. So, we have created a team that serves real estate finance clients with capital markets and equity market capabilities, so that we can provide clients with more than just loans.
REC: What sectors and geographies are sponsors favouring?
AV: There is a lot of appetite for residential; everyone wants to be in it, but there is limited product available. The office market is still pretty hot – in certain cities it is at risk of overheating, although some have little supply. Retail is less popular as we see the impact of e-commerce, and the sector that is benefitting from that trend is logistics. That is growing rapidly, with supply coming to the market and we see pricing spiking up quickly. Also, there are niche sectors, such as senior housing, where investors can get additional yield.
By location, it very much depends on what type of investors you are dealing with. The Asian players, those that are less experienced in Europe, go for the most liquid market – London. We see the more experienced ones in Germany’s ‘A’ cities. We do get some questions on Spain and Italy to an extent. Spain is really gearing up – the Spanish economy is doing very well.
REC: Is European real estate genuinely part of a global market?
AV: It is certainly a global market. Asian capital plays a large role. A lot of investors are looking at Europe and I can’t see that changing any time soon. The new capital controls regulation in China has had some impact, although there are still many firms that can invest, so the impact is not so severe. Korean investors may be impacted by the geopolitical issues in that region.
But there is definitely a global trend of capital heading to European real estate; it is starting to be a truly global market. American and Canadian money is very big in Europe. This is a trend that plays into banks’ favour.
It means that we need to consider expansion in geographies across the world. Last year we decided to grow our team in Australia, as clients were saying they’d like us to help them invest there. We are investigating, as clients asked us to, whether it makes sense to go to Canada and the Nordics – we’re pretty close to making that decision, but we would have to build those businesses from the ground up.
REC: Are you concerned about the political backlash to globalism and its potential effect on cross-border capital flows?
AV: It is very difficult to predict what will happen, but this international way of doing business is too strong to be stopped. You cannot go back – the economy would suffer too much.
REC: As a major syndicating bank, how has that market changed in Europe?
AV: The Asian capital trend has brought debt into Europe, primarily through the syndication market. Korean investors have been looking for yield, through mezzanine and even senior debt as well as equity, so that opened up more possibilities for syndicating.
On the other hand, there are counter-trends. In the German market, for instance, it is very common to keep deals on balance sheet. The German market is very atypical as a banking market; as a lot of Germans have their savings with banks – the banks have more liabilities than assets, and so need to create assets by keeping good deals on their books.
REC: On the subject of Germany, EXPO Real is coming up. Do you see Germany as a good opportunity for a foreign bank, or is it just too competitive?
AV: We are a very big bank in Germany; we have a huge German savings bank. So, like the domestic institutions I just described, we have a lot of liabilities, so we need assets. Germany is one of our main focus countries in which to grow.
We have a Pfandbrief license and an online bank there, so we have the benefits of cheap funding in Germany and the execution capabilities of an international bank, which is a very strong combination. In January, we partnered with Berlin Hyp in the long-term financing of the TanusTurm office tower in Frankfurt for Tishman Speyer, and in February we provided €230 million with LBBW to refinance the Cityhold Office Partnership, with two-thirds of the portfolio located in Hamburg. It is a competitive market, but it can provide great deals.
Sponsored by ING.