During an on-stage panel discussion in June at PERE Europe, the annual London event hosted by Real Estate Capital’s sister title, the subject of real estate debt advisors – and their value in today’s market – cropped up.
Providing a borrower perspective, Belinda Chain, head of asset finance at Europa Capital, said her team does keep in contact with intermediaries, but sources most loans direct from lenders: “Europe’s a very insular market,” she remarked, “you know the participants. You know the landscape.”
Jeffrey Rubinoff, partner at law firm White & Case, who has extensive experience representing both sides in property finance deals, picked up the discussion: “I’m always intrigued why some of our large, America-based, repeat-borrowing clients still use intermediaries to bring them back to the people they already know.”
One of the panel’s lenders, ING’s Michael Shields, offered an explanation. Borrowers, he suggested, may have in mind the lenders they expect to provide the finance they need, but will run an intermediated process to bring to light any “outliers” willing to offer improved terms. “Then, [the borrower] goes back to the banks it wants to do the deal with and says ‘look, you’re 10 basis points out of the market’,” he added.
In European property finance markets, where many participants know each other, advisors face the challenge of convincing potential clients they can source their optimum debt deal. In their favour is the gradual broadening of debt options across Europe, with new lenders entering the space regularly. In the UK alone, sources note more than 100 active lenders, acting on behalf of capital providers with varying returns requirements and differing debt strategies.
While casting the net far and wide in a bid to find the best terms on offer is certainly an aspect of the real estate debt advisory market, those advisors Real Estate Capital spoke to argue their role is far more nuanced. Many are not keen to be labelled ‘brokers’, arguing their role is not simply to chip away basis points of margin or edge up leverage in a deal by a few percentage points. Advisory, they insist, is about adding genuine value to a financing process; working with a client to craft the right financing structure for a business plan.
“Brokerage is a US model which is quite different from advisory,” argues Shripal Shah, the former HSBC property banker who joined hedging specialist JCRA in 2016 to lead its property advisory activities, which include debt avisory. “Brokerage is about sending the sales brochure to as many people in the market, including sometimes multiple targets in the same lending institution. Advisory is about sending the most appropriate message to the right person in the right institution.”
Although most real estate debt in Europe is not raised by intermediaries, there is a growing appreciation in the borrower community for the role advisors play, even though there are sceptics. Some lenders also see their value. One lender from a private equity firm, speaking in private, explains advisors are one of several channels through which deals are sourced. “We view some of them almost as clients of ours,” he says. “A lot of US lending comes through brokers and, in Europe, in the past few years, there has been a transition to advisors gaining a toe-hold.”
Advisory is best described as a growing aspect of the European real estate markets. “It might be ambitious to say advisors are part of the fabric of the European market, but debt advisory is definitely a growing trend,” says Shah. “My clients are getting comfortable with using advisors., but it is about showing you can add value.”
In the US, property debt brokers are part of the furniture and data on the size of the market is more freely available. That the size of the European market is so difficult to ascertain demonstrates how less mature it is in comparison.
Asked to estimate what proportion of debt raised is done so through advisors, Shah suggests probably more than 10 percent of UK commercial real estate deals, accounting for circa 20 percent of volume, given larger, US-investor sponsored mandates are increasingly being handled by intermediaries.
Michael Kavanau, senior managing director at HFF, the US-headquartered firm which opened a London operation last year, is more bullish in his estimation. While the proportion of debt raised by volume by intermediaries in the UK market was less than 10 percent as recently as five years ago, he estimates it could be 30 percent today “and trending up quickly as more clients recognise the value-add proposition”.
Continental Europe is far less brokered. Kavanau’s estimate is 10 percent of debt is raised through advisors. “Germany and Paris are the major markets and they are very under-brokered markets. Somewhere like Spain would be above 10 percent because so much foreign private equity is active.”
As Europe’s real estate debt space comes to resemble the North American market, with a growing array of lenders continuously evolving their product offering and pricing, advisors will continue to provide borrowers with visibility and guidance around what is deliverable, argues Riaz Azadi, managing director at Eastdil Secured’s London office. “Look at the direction of the market,” he says, “it’s more professionalised and continues to be so. We have to keep at it and continue to drive the evolution.”
One borrower questions the viability of adding an advisor’s fee to a sub-€40 million deal. In today’s market, borrowers employing the services of an advisor can expect to pay fees according to a sliding scale, depending on the complexity of the job. The size of a deal also informs the fee structure, even though some argue a small-ticket transaction can involve the same amount of work as a big deal. According to advisors, fees typically fall into the territory of 50 to 100 basis points on the total loan amount. Up to €25 million, one advisor explains, 1 percent can be charged. Above that, fees taper down to 50bps, and further still once a loan tips the €100 million mark.
“If a broker does an average job, they cover the cost of their fee,” says Kavanau. “If they do a great job, they can save the client three to five times the fee. There is still a belief that debt is a commodity. It is true to an extent, but the reality is an intermediary, if they do a good job, helps secure better soft and hard terms.”
Paul Coates, head of CBRE Capital Advisors’ debt and structured finance team in EMEA, says fees are not a one-size-fits-all model: “Our priority is to understand what our clients are trying to achieve and to develop a tailored proposition that exactly meets their requirements. The complexity of the scenario determines the fee.”
In a market with an increased focus on deal structures, covenant packages are an area of negotiation between lenders and sponsors. Debate rages among real estate finance market players as to whether there is a slide towards covenant-light in the sector. As borrowers have more lenders to chose from, some say, they are increasingly asking for more headroom in certain areas of covenant packages and, in some cases, the removal of some terms altogether.
“We are helping to soften covenants for clients it’s important to, and for those that deserve to have those covenants relaxed – that’s part of our job,” says Kavanau. “A well-capitalised, astute private equity firm which is borrowing appropriately does not need the babysitting element of a heavy covenant package.”
But can advisors negotiate harder on such covenants than private equity firms, not known for a lack of confidence in such matters? “We’ve come up with some creative solutions which are a hybrid of US and European loan structures that the client might not have thought of,” says Kavanau, before adding: “But PE firms are also good at negotiating.”
Although global capital continued to pile into real estate across Europe in 2017 and into this year, financing mandates have become more difficult to source in parts of the market. The large proportion of investment accounted for by Asia-Pacific-based buyers which rely on domestic banking relationships, or buy with cash, has been one factor.
The UK continues to be affected by Brexit negotiations, admits JCRA’s Shah: “The market sentiment has not helped any advisor. There’s been a drop-off in deals, with many investors not buying or selling.” He does, however, note a pick-up in activity during Q2.
However, depending on the size of their operation, advisors are finding deals. Those at the smaller end of the scale are targeting private clients with little in-house debt expertise, while larger advisors specialising in M&A-type activity have benefitted from the unsecured refinancing deals undertaken by several REITs in the past year in a bid to consolidate their finances.
At the large end of the scale, Eastdil’s Azadi reports a busy year across Europe, with large single assets and pan-European portfolios trading, as well as an increase in the volume of securitisation and construction deals.
Business models differ across the debt advisory market. The common theme is advisors of all shapes and sizes still need to prove their worth to sponsors. The fact more are building advisory businesses suggests the wider market is being convinced of their value.
Ex-RBS banker makes plans at CBRE
Paul Coates, former head of real estate at Royal Bank of Scotland is the latest high-profile banker to move into the property debt advisory space. In April, after a decade at the helm at RBS, Coates joined CBRE Capital Advisors – the finance-raising business within the global consultancy – to lead the debt and structured finance division in the EMEA region.
Several experienced real estate bankers have swapped life in lending institutions for roles in the intermediary space. Within Coates’ team is Steve Williamson, who joined in 2013 from Deutsche Bank, and Marco Rampin, who joined in 2015 from BNP Paribas. Indeed, Richard Dakin, the managing director of the Capital Advisors business, joined in 2014 from Lloyds Banking Group.
“Richard wanted to hire someone to lead the business through its next stage,” comments Coates, “and I had led large businesses at RBS.”
The next stage for CBRE’s debt unit, Coates explains, begins with an assessment of the underlying trends driving capital in the European markets. Growth in its UK business is targeted, although capturing more business in Continental Europe will be crucial, he says.
“The priority is to understand where the property market, and the capital, is going,” explains Coates. “For instance, alternative sectors have been very active. Cashflow and asset management opportunities are a major focus, due to concerns about high capital values. If that is where the equity is attracted, there will be debt opportunities.”
Equally, identifying risks to the debt market is important, Coates adds: “UK capital values may fall 10-15 percent in the next couple of years; how will borrowers respond? Will banks be willing to refinance?”