Finance for less mainstream assets has gradually tightened in the UK this year, borrowers told the Real Estate Capital Finance Forum, with banks no longer able to meet all their financing needs.
Speaking on a panel of UK and pan-European borrowers, Andy Rogers, group treasurer at private equity real estate investor Frogmore, said: “It is harder to source debt in certain sectors. Lenders are falling over themselves to finance dry investments, but with letting risk, interest rapidly reduces”.
“The lending community has turned a little more sponsor sensitive,” suggested
Nick Sanderson, Great Portland Estates’ finance director. “That had loosened a bit in 2014/2015; now with the more uncertain outlook and since Brexit… the sponsor is more important than ever.”
Banks are seen as particularly cautious. “From conversations we’ve had with UK clearers, slotting is giving them issues…They have loan books running off that they need to replace but if they only want to take very low risk, the opportunities are going to be less.” Rogers added. “They are struggling a bit.
“We are no longer in a situation where relationship lenders can do all our financings for us. We have a wider net of relationships.”
Rob Bell, a partner at UK private equity firm, Clearbell Capital, believed borrowers are getting more comfortable with debt funds. “(Initially) we’ve been nervous about whether they will still be here (in future),” he said. “What has moved on is that we have seen a number of debt funds that are matching our own model of repeat capital raising. And as those funds become more established that issue is dissipating. They can be very nimble, if you fit their areas.”
Gadi Jay, head of European financing at Blackstone, concurred: “One thing we’ve found is that they are able to operate in more restrictive environments and so provide an important source of liquidity.
Edward Daubney of Cushman & Wakefield’s debt advisory team, suggested one area of opportunity for debt funds is to finance smaller loans, in the circa £10 million to £30 million bracket where he said it was difficult to engage banks’ interest.
Debt fund panelists suggested their products were proving they complemented the lending strategies of banks. Arnaud Heck, head of real estate finance at Natixis Asset Management which is raising its second, three times larger, European senior debt fund, commented: “Banks need to churn the balance sheet faster to reach return on equity targets,” while UBS’s European whole loan CRE fund manager, Anthony Shayle, claimed that anything other than ‘safe’ lending is better-suited to debt funds than bank finance: “It’s about where the risk should be put lending against different types of property assets, and the allocation of risk across the economy as a whole. Banks should lend at the lower end of the risk spectrum.”
In the lower-for-longer interest rate environment, investors are interested in private real estate debt as a source of income and yield, speakers said. Heck noted that the asset class is increasingly supported by regulatory changes: “There’s an increasing appetite for private debt and it’s driven by regulation.”
Michael Morgenroth CEO of Caerus Debt Investments, which has mainly insurance company investing clients, added: “There’s no asset class under Solvency 2 that offers a higher return than real estate debt”
Borrowers told the Forim they are still getting finance post Brexit, though commercial speculative development finance is impossible and margins have gone up by 50 basis points. However, the margin rise is roughly cancelled out by lower swaps.
Jay said that Blackstone had acquisitions going through around the time of the referendum vote ‘when we were unsure where they would price and with how much leverage, but there were still bids for that debt.”
Farrah Brown, TH Real Estate’s head of treasury added: “We had two term sheets out during the vote and after it. Lenders had to check back with head office as to whether they could hold the price and they did, so we benefited from that plus the lower swap rate. Now the price would be higher.”
Jay said Blackstone would pay a bit more for the certainty of a full underwrite over a club. “In an uncertain environment we’d look to lock the deal down and pay. The market is still liquid and still open, but there is more uncertainty and we want certainty.”
Preliminary numbers presented by Real Capital Analytics’ Tom Leahy confirmed that Q3 2016 in the UK investment market would be “very, very weak” at about £6 billion compared to the Q3 average of £12.5 billion, led by a dramatic fall off in investment in London. “If you’re a seller, maybe you’re going to wait”, he said.