Huge weight of deals are set for refinancing over the next year but quality will ensure stability
At almost €9bn, the volume of loans secured on German multi-family housing that needs to be refinanced by the end of 2013 is massive, yet it has not destabilised the market. This is in large part because the assets backing the loans are mainly good-quality, performing properties and because there is strong demand for them when portfolios come up for sale.
Of the quantum of debt that needs to be refinanced, the largest single transaction is the €4.4bn GRAND CMBS. But its properties aren’t distressed, “it’s just that the debt is all due on one day”, points out Phillip Burns, chief executive of Corestate Capital. A five-year extension of the bonds to 2018 has been proposed by the borrower, Deutsche Annington, in exchange for €504m of equity and a 117-basis point margin increase for bondholders. The idea is for the outstanding securitised debt to be reduced in tranches.
“If all goes to plan over the next few years, it will be a consensual restructuring and a gradual refinancing, so it’s not going to turn out to be anything that the distressed debt guys can get excited about,” notes Colin Fleury, head of secured credit at Henderson.
This goes for several of the €6bn-worth of portfolios Savills calculates have been traded in Germany already this year, including Landesbank Baden Wurtenberg’s (LBBW’s) 21,000-unit portfolio, a sale that was driven by requirements imposed by the European Commision, not because the assets were problematic. Neither is the upcoming sale of 33,000 homes held by state-owned BayernLB’s GBW property subsidiary distressed in terms of property – in fact, the assets are considered to be one of the best housing portfolios in Germany.
Nonetheless, some of the 180 portfolio sales in the last 12 months have been distressed. Benson Elliot’s purchase of a 3,100-unit Speymill portfolio called Noah was one, while Cerberus bought insolvent Speymill’s larger Halk portfolio of 22,000 homes and Corestate picked up 3,000 apartments in Berlin from a foreign vendor that had acquired the assets at the peak of the market. Blackstone acquired over 8,000 residences from administrators to Level One, many of which were in eastern Germany.
Further distressed assets could surface from the €2.18bn Gagfah-sponsored GRF 2006-1 CMBS, the other very large transac-tion with a loan expiring in 2013. Gagfah, Germany’s largest listed residential property company, which is 60% owned by Fortress Investment Group, also intends to sell the 43,000-unit Dresden portfolio owned by Gagfah’s Dresden Woba unit to pay off a further €1bn of debt which is securitised in Windermere IX and Deco 14. The Dresden assets were bought for about €1.7bn from the city’s government in 2006, but have not generated rental income and sales proceeds sufficient to justify their high purchase price.
Attention turns to Dresden
Gagfah is looking to trade the 42,688 residential, 1,110 commercial, and 8,683 parking units in the less economically buoyant Dresden region of eastern Germany at near par. This side of the country plays second fiddle to western German cities in terms of demand for residential real estate, but the limited buying opportunities in the West have contributed to interest in investment potential there. Investor/asset manager Patrizia’s research on the subject last year ranked Dresden as commanding the second-highest rents in the East, after Berlin, and said demand for new accommodation would be high through to 2025, with 40,476 apartments required in Dresden.
Benson Elliot’s purchase of two Speymill portfolios (in addition to “Noah”, the private equity firm winkled out the 3,000-unit TOR portfolio earlier this year) leads portfolio manager Joseph De Leo to predict: “We’re going to see more and more opportuni-ties come from CMBS over the next 18-24 months. There are immediate opportunities in the multi-family sector as a lot of those investments made in the 2004-08 phase are starting to come up for loan maturity.”
The TOR portfolio comprised good assets in Berlin, Frankfurt, Munich, Ham-burg and Cologne, with 91% occupancy. The investment was a result of uncured covenant breaches and ended up being a maturity issue which led to insolvency. “It was an opportunity that came about through the bondholders pulling the plug on the original sponsors,” De Leo recalls. “We had relationships with the servicer and with Berlin Hyp, which allowed us to put the financing together.”
The firm sold half of a third, 700-unit residential portfolio in Berlin called Silver-tower that it acquired in 2010, taking advantage of substantial liquidity generated by a range of prospective buyers includ-ing institutional investors, listed vehicles and high-net-worth individuals. “These are the parties we are going to sell assets to. We don’t see a lot of the German funds – they’re more geared towards buying more stabilised assets,” according to De Leo.
Investors are increasingly attracted to multi-family, owing to the fear of inflation, currency risks and uncertainty in the capital markets. High levels of competition could make return expectations for opportunistic investors difficult to reach, however.
“For people who want to come into the sector to buy some of these repositioning port folios, the pricing is getting more expensive,” says Tim Brückner, a director of asset manager Corpus Sireo.
Morgan Stanley was last year said to have allocated €1bn to German residential investments, although commentators reckoned its only option would be to search for distress in order to achieve the 8-10% yields it was aiming for. However, Deutsche Annington says it is achieving 8-9% total returns.
Peakside Capital has done some deals in the sector in the past, and is “continuously looking at multi-family but [has] been priced out,” says Boris Schran, head of acquisitions at the company. If you go to places with strong demographic trends, like in Munich, where there is high demand for multi-family, it’s very tough to get these investments done at a decent price.” It has a sizeable portfolio in eastern German growth cities, although even there it has seen quite a price increase.
Axel Froese, an investment manager with Cordea Savills, believes the sector can be “more risky than people think”. “A lease contract with an existing tenant is very protected, so the landlord doesn’t have the same rights as a landlord in the UK, for example,” he warns. “Older schemes of 10 or 15 years have higher non-recoverable costs so the liquidity is often very tight, the value is high, and there is a mismatch.”
Insurers and pension funds join queue for multi-family refinancing deals
German banks continue to lend to the multi-family sector and other potential non-bank lenders are also showing interest in the asset class for the first time. Gagfah is talking to German pfandbrief banks and landesbanks, thought to include LBBW, HSH Nordbank, Deutsche Pfandbriefbank, DG Hyp and Landesbank Berlin, as well as insurance companies and pension funds about refinancing its €2.18bn GRF 2006-1 CMBS.
Fortunately, “there is a lot of competition from German banks for multi-family financing,” says BayernLB director, Gustav Kirschner. Competition is higher for deals of between €20m and €40m, he notes, while for bigger deals five to 10 banks are active. “Some international banks have stopped in this sector,” he adds.
BayernLB lent €500m on multi-family deals over the past 12 months. This included the debt capital it provided for Deutsche Wohnen’s €1.24bn purchase of the 23,500-asset BauBeCon portfolio from Barclays. BayernLB, HSH Nordbank, UniCredit Bank, DG Hyp and pbb Deutsche Pfandbriefbank each provided separate facilities with a combined total of €730m, with Deutsche Wohnen investing €430m of equity.
Pbb’s €285m share – some of which will be syndicated – is an example of the group’s “significant headroom to finance multi-family real estate”, according to Bernhard Scholz, member of the bank’s management board. About €5bn – or 20% – of its €24.6bn real estate portfolio (as of 30 June) was attributed to what pbb calls “commercial residential real estate finance”.
Kirschner says there is only so much of this business BayernLB can handle, but its annual capacity exceeds €1bn, on the basis of multi-family being low-risk. “It’s good for our pfandbrief refinancing to have a big chunk of multi-family in there,” he adds.
Another means of refinancing multi-family could be to use the capital markets. Vitus, a consortium led by Blackstone, is attempting to refinance £580.13m of now-matured debt within the Barclays Capital’s 2005-issued Centaurus Eclipse CMBS via a new agency CMBS. The bonds will be sold directly on behalf of the borrower and the cornerstone bond investor is JP Morgan. A preliminary offering circular was due in early September.