Notwithstanding a drop in UK market transactions and negative sentiment towards retail, investment in European commercial real estate remained robust in 2019. According to data provider Real Capital Analytics, European volumes reached €308 billion last year, representing a 2 percent dip from 2018.
Expectations of rising interest rates hampered demand for real estate early in the year, though it became apparent in March that the European Central Bank would keep rates low to stimulate growth. The ECB’s announcement in September that it would resume its quantitative easing programme provided further impetus to investors to find relative value in a lower-for-longer environment by allocating capital to real estate.
With no end to the property cycle in sight, a diverse mix of debt providers spent 2019 arranging finance to support the strategies of hungry investors.
A defining theme of the year for both equity and debt market participants was the challenge of deploying large volumes of capital into a competitive late-cycle market. Several managers of equity capital achieved this through M&A activity and platform acquisitions, supported by lenders. A prime example was London-based private equity real estate firm Henderson Park’s take-private of Ireland’s first real estate investment trust, Green REIT, in August.
The debt financing of the transaction was recognised by our readers as the year’s stand-out investment financing deal in the Real Estate Capital Awards 2019. Arranged in just four weeks to support the closing of the acquisition, Blackstone Real Estate Debt Strategies, the real estate lending business of US investment giant Blackstone, provided a €1.2 billion loan. The deal was hailed by Eastdil Secured, the advisor in the transaction, as the first time in European history that an alternative lender had provided finance in the take-private of a real estate company.
Another major platform transaction saw private equity firm Kildare Partners acquire the Finnish office business Technopolis in May. In this case, an investment bank provided the debt finance: US lender Citi underwrote a €1.1 billion senior and mezzanine financing package in the year’s largest real estate debt transaction in the Nordics. The deal ensured Citi’s place on the shortlist for Lender of the Year: Nordics, which it went on to win.
The continued flood of investor capital into private equity real estate vehicles drove large-scale investment strategies and the need for finance. US investment firm Blackstone, winner of our Borrower Finance Team of the Year (Fund Manager): Europe award, was the market’s largest borrower. It was the sponsor in several major European commercial mortgage-backed securities transactions and sourced finance for real estate mega-deals – including in Spain, where it arranged €1.5 billion of finance for its Hispania platform.
US investment banks proved to be important lenders in the European property market, stepping in to finance large-ticket transactions in short timeframes. The European real estate finance group within Goldman Sachs’ investment banking division was among them, and was voted Bank Lender of the Year: Europe. It beat US banking peer Bank of America Merrill Lynch to the award, as well as French banks BNP Paribas and Société Générale, both of which were shortlisted because of their consistent and sizeable lending activities across European markets. When it came to large bank financings in 2019, US or French banks were typically behind them.
In Goldman’s case, those deals included a leading role in a £900 million (€1.07 billion) secured bond financing of China Investment Corporation’s Logicor logistics platform. It was also among those US investment banks that supported the revival in Europe of CMBS. Goldman securitised three loans across two CMBS deals totalling €609 million, including the first securitisation of a UK cold storage facilities portfolio.
Another major participant in the CMBS and loan syndication markets was Bank of America Merrill Lynch, the winner of our Syndication Team of the Year: Europe accolade. Its European real estate finance team distributed more than €5 billion of senior and mezzanine loans in 2019, either through syndication or bond issuance. Among its CMBS issuance, it arranged the first UK purpose-built student accommodation CMBS, sponsored by property investor Brookfield. In total, it was behind five European CMBS deals.
Commercial banks remained a key part of European real estate financing, notwithstanding the pressure on them to generate profit in the face of slimmer loan margins and the constraints placed upon them by regulation. As Basel IV loomed, many began to right-size their portfolios for a regulatory regime in which higher-risk loans would require larger sums of capital set in reserve.
Germany’s Pfandbrief banks were active across many countries, as was ING. However, in our awards, the Netherlands-headquartered bank was recognised as Lender of the Year in its home region, Benelux. It completed 46 lending deals in the region in the year to December, with a total loan amount of €1.2 billion and a final take of €825 million.
Although banks remained the primary sources of real estate debt capital in Europe, insurance companies continued to win market share. While many institutions put money to work by investing in debt funds, some rolled up their sleeves to write loans directly. Among the latter was Allianz Real Estate, the Munich-based insurance group’s property management arm, which won our Insurance Company of the Year: Europe category. During the year to November, Allianz grew its European real estate lending book to €8 billion. The insurer demonstrated a pan-European strategy, including opening a London office as it increased its exposure to the UK.
As institutional capital moved into real estate lending, debt fund managers faced the challenge of deploying it. AXA Investment Managers – Real Assets, voted our Senior Debt Fund Lender of the Year: Europe, had a commercial real estate debt portfolio of €10.7 billion as at Q3. During the year, it secured two large-scale commercial real estate debt mandates for a combined total of €1.4 billion: a mandate from a Dutch pension and a develop-to-hold mandate with one of its strategic partners.
While investors increased their allocations to senior lending strategies, those seeking higher-yielding products also wrote cheques to debt fund managers, including our High-yield Debt Fund Manager of the Year: Europe, Starwood Capital. As of September, Starwood had a £416 million portfolio of UK and continental European loans, including senior, subordinated and mezzanine loans, bridge loans, and selected loan-on-loan financing.
Across the real estate industry, environmental, social and governance issues were forced to the top of the agenda. The key issue for those providing finance to the real estate sector remained how to promote sustainability without having direct responsibility for bricks and mortar.
Our Sustainable Lender of the Year: Europe award, now in its second year, recognises those making the biggest strides in this area and, for the second year running, Lloyds Bank was voted the winner. The UK bank closed its largest ever bilateral financing under its Green Lending Initiative with a £200 million financing for investment manager Blackrock’s UK Property Fund. Lloyds also acted as green coordinator on a £185 million financing of developer Bruntwood’s SciTech scheme in Manchester. The bank has announced a sustainability app to help clients improve the energy efficiency of their buildings.
Property as a service
A key theme of last year across real estate markets was the increasing shift towards an operational, property-as-a-service model. For lenders, it meant considering how to underwrite loans against less-predictable income streams. Examples of these included co-working, co-living and build-to-rent residential schemes, particularly in the UK, where rental property is not the norm in the new-build market.
Our Development Financing Deal of the Year: Europe served as an example of a loan in the build-to-rent sector. Private real estate company Cain International provided a £385 million, six-year whole loan to finance the construction of a 641,000 square foot residential tower in the Nine Elms area of London. The borrower, again, was Henderson Park, alongside residential developer Greystar Real Estate Partners.
The crisis in retail remained another key theme. Several lenders found themselves at the negotiating table with borrowers that had tripped loan covenants as retail property values fell across the market, but particularly in the UK. In prime retail, however, some continued their strategies and secured the debt necessary for their portfolios. Among them was Unibail-Rodamco-Westfield, which won our Borrower Finance Team of the Year (REIT): Europe award. In June, the listed retail giant secured a €500 million, 30-year bond. The following month, it secured a £750 million refinancing of one of its key UK assets, the Westfield Stratford City mall in east London, which was financed through a CMBS-like structure. Then in October, it raised €750 million through a 12-year bond. The capital issuance and refinancing showed that, for most prime assets, lenders were prepared to finance retail.
Behind the scenes
The increasingly complex role of debt advisors in European real estate was apparent.
Debt advisory remains a niche practice, with a handful of large players and a growing number of smaller shops. The winner of our Debt Advisor of the Year: Europe award, First Growth Real Estate, an independent business based across London, Paris and Milan, was one of the few operating across several jurisdictions. Its 2019 mandates included sourcing a refinancing and capex financing of hotels near Paris, financing a French serviced-offices portfolio, as well as Italian loan workouts and a Madrid residential portfolio.
Similarly, loan servicers are playing a more diverse role across real estate debt. As well as managing larger portfolios of loans as lenders grow their assets, they are servicing a new generation of CMBS deals and underwriting legacy bank loan portfolios on behalf of prospective buyers. London-based Mount Street, winner of our Loan Servicer of the Year: Europe award, won six new CMBS servicing mandates. Its Greek office also won a credit servicer licence and was part of the winning non-performing loan consortia for two portfolio purchases.
Law firms remain important behind-the-scenes players. White & Case, winner of our Law Firm of the Year: Europe, represented Italian savings banks and Italian bank UniCredit on a multi-originator securitisation of €1 billion of residential mortgage loans. It also acted on Greek non-performing loan deals, the €1.9 billion refinancing of logistics owner CTP’s Czech logistics portfolio, and Citi’s financing of the take-private of Nordic platform Technopolis.