On the second working day after the UK’s official exit from the EU, as the participants in Real Estate Capital’s UK roundtable meet at developer Argent Related’s offices, the historic events of the preceding Friday have had no visible effect on the people bustling toward shops and offices in London’s King’s Cross district.

Although Brexit tops the agenda for the discussion, the five property industry experts gathered around the table – including three borrowers – argue that the UK’s real estate debt market has, so far, weathered the political storm.

“I don’t think any commentators would have predicted that the UK real estate finance market would remain completely liquid from the referendum in 2016 through to today, but that is what has happened,” says Alex Hamilton, Argent Related’s corporate finance lead. He adds: “Most borrowers with an acceptable scheme have been able to raise finance.”

Jeffrey Rubinoff








“Those investors who want to launch a European debt strategy are often drawn first to the UK”

Jeffrey Rubinoff
White & Case

Residential developer and investor Quintain closed three financings in 2019, a year during which Brexit consistently dominated news headlines. Richard MacDowel, the company’s treasurer, argues that it did not “impact massively” on lenders’ terms. “Talking to funders that are committed to the UK, it is kind of a back story. I understand however that it has impacted capital raising for new funds. The UK may have received fewer allocations over the last 12-24 months,” he says.

German banks, a popular source of senior finance for UK transactions in recent years, took a step back from the market as the Brexit debate played out. “Of all the lenders we spoke to last year, they were the ones most nervous about the UK in terms of political and Brexit risk,” comments MacDowel. However, he says that in subsequent conversations he has had with German institutions they have declared themselves “open for business”.

The feverish political climate of the closing months of 2019 appears to have cooled, at least for the time being, following the election of a Boris Johnson-led Conservative government with a substantial majority. Alex Price, UK chief executive of property investor Fiera Real Estate, observes that after 2019 started on a positive note, the uncertainty generated by the Brexit negotiations suppressed deal-making in the latter half of the year. He suggests that pattern could repeat itself in 2020.

“This year we have seen a strong start from international investors who see a more positive outlook for the UK following the election. My suspicion is that the first half of this year will be better than the second half because the feel-good factor and ‘Boris bounce’ will dissipate as we face the harsher realities of whether we are going to hit our self-imposed deadline for a trade deal at the end of the year.”

Has sustainable finance had an impact?

Although some UK lenders have begun to experiment with green loans, such programmes still need further development, suggest the roundtable participants.

White: If it delivers more energy efficient buildings then green lending has to be a good thing. Lloyds Bank’s green lending product offered a margin discount and delivered some successes in terms of the type of buildings that were funded. It must be a meaningful benefit to be worthwhile in complying with the requirements and covenants though, so it is likely to be more relevant for larger lot sizes.

MacDowel: Many lenders seem more focused on green lending. It is interesting to unpick why, and it seems there are a number of drivers. Aside from publicity, my sense is that there are two key points to consider. First, the perceived risk profile of green assets and a belief that more efficient buildings represent lower risk. Second, capital markets liquidity. By creating green assets on their balance sheets, the banks can diversify their funding sources by attracting green bond investment, which is a hugely growing market.”

Rubinoff: The question is how to translate environmental achievement into an economic consequence for lenders. Does having a higher sustainability score for a building translate into higher value? If it does, then for the same amount of leverage you will naturally get more debt because the building is worth more. Is my exit position in five years less risky because the building is more sustainable? If so, I can charge less, or lend at a higher LTV because my opening leverage is a function of exit risk. At the moment it is still difficult for lenders to quantify those factors, however.

David White, head of debt strategies at Tunstall Real Estate Asset Management, providing a lender perspective on the discussion, does not expect uncertainty towards the end of the transition period to be as acute as in the latter part of 2019. “The political uncertainty generated by the prospect of a Jeremy Corbyn-led government was a bigger factor than Brexit, particularly for US capital,” he says. Brexit did not affect the terms Tunstall offered borrowers, he adds: “Our pricing has remained stable throughout, but we probably have a little more appetite and confidence now.”

To nods of agreement around the table, Jeffrey Rubinoff, partner with law firm White & Case, argues the overarching concern is that the cycle may have peaked. “When you are at a point in the market that is considered toppy, other risks, like Brexit or a Corbyn government, start to be more of a factor because there is less tolerance to absorb the shocks,” he says.

Liquidity factors

The participants agree that debt market liquidity has held up, despite Brexit uncertainty. Figures from City, University of London’s Cass Business School show new origination in H1 2019 reached £23.3 billion (€27.7 billion), compared with £21 billion in the first six months of 2018. However, only 39 percent of that debt financed new property acquisitions, meaning many lenders relied to an extent on refinancing.

Richard MacDowel“Talking to funders that are committed to the UK, [Brexit] is kind of a back story”

Richard MacDowel

UK banks are taking a circumspect approach to lending, driven by governance, not Brexit, argues White. “It is more to do with regulation and slotting. Banks’ cost of capital pushes them down a very restricted route in terms of lending opportunities. Being an unregulated lender gives you more opportunity to assess a deal in terms of the wider spread of risk rather than the limitations caused by slotting.”

An increase in institutional capital into the debt market has helped maintain liquidity. Rubinoff says more investors are looking for lower-risk exposure late into the property cycle. “I am getting a lot of enquiries from investors about developing debt strategies, and much of that capital is UK-bound. In most parts of Europe, if you are opening a commercial lending business, you need to apply for a licence, but in the UK real estate lending is not a regulated activity. Those investors who want to launch a European debt strategy are often drawn first to the UK because, as well as being the largest market, it is the most frictionless in terms of entry.”

David White

“In the last couple of months we have seen a few transactions where banks are prepared to take a big writedown to get out of loans in the retail sector”

David White

Fiera already has debt strategies in Asia and North America and the creation of a UK debt fund is on the firm’s long-term agenda, reveals Price. “The UK clearing banks’ caution has been counterbalanced by the insurance companies coming in at one end of the market lending on long dated income, and the debt funds lending on riskier assets at the other,” he says.

“We see lots of alternative lenders specialising in areas which the banks may struggle to service – specific asset classes, regions or facility sizes,” adds Hamilton. “The different groups in the lending community are each finding their niche, so there is a nice range of options for borrowers. But the banks still perform a crucial role and we still use them.”

Development risk

Several of the participants identify development as an area in which financing, and particularly bank financing, can be difficult to secure on attractive terms. “We find borrowing against speculative development, however good the asset may be, is tough,” says Price. “I suspect that may come down to slotting, and the Basel IV banking regulation changes coming in next year, which may increase the amount of capital banks need to hold on their balance sheet against loans, so that will likely mean less lending for development.”

“We see lots of alternative lenders specialising in areas which the banks may struggle to service”

Alex Hamilton
Argent Related

The UK’s purpose-built private rented residential sector is viewed by many in the industry as a major growth area. Quintain specialises in the sector, although MacDowel says the development risk and post-completion leasing risk inherent to the business model limits banks’ appetite. “When we funded our latest plot last year, we had strong appetite from lenders at the top end of the loan-to-cost range, typically the debt funds who were looking to generate higher returns. The amount of leverage then dropped away quite dramatically to the European and UK banks that were priced more competitively but were much less flexible and not offering as attractive a product.”

He adds: “We are struggling to get real traction from the UK clearing banks around the size of loans and risk profile for build-to-rent housing.” They remain very conservative on leverage, whether this is because of slotting or a lack of track record for the sector in the UK, admits MacDowel. “Their lending policies still seem structured around build-to-sell and the challenge with build-to-rent is you don’t have a lease or a pre-sale, so it is categorised as speculative financing.”

“The ‘Boris bounce’ will dissipate as we face the harsher realities of whether we are going to hit the deadline for a trade deal at the end of the year”

Alex Price
Fiera Real Estate

The problem facing the banks in financing such schemes is less one of regulation than underwriting, suggests Rubinoff. “It is a sector that does not have the track record that would allow them to evaluate it. They will lend into hotels for example, which are also operational assets, but there is enough market information out there so they can be confident about valuation. The issue is absence of data.”

Hamilton argues that financiers are starting to look more favourably on the sector. “Two or three years ago there were only a small number of credit funds lending on BTR assets, but now most of the banks will also be able to offer some leverage.”

The growth of the private rented sector nationwide is constrained because schemes are less financially viable outside the southeast and major regional towns and cities, says Price. “Residential capital values are too low, so after deducting the building cost you can’t develop unless the land is subsidised. To my mind we should be looking at help-to-supply, not help-to-buy, because subsidising people to buy just accelerates the price and exacerbates the issue. Government should be intervening in the land market to help developers bring forward residential in co-ownership.”

Price believes the opportunity for PRS developers is part of a wider evolution in the culture of the real estate business. “The UK is changing from a lease-driven market to an operational, service-driven one. Equity providers are becoming more customer-focused, and the banks are also having to change because there is more operational risk in the market.”

Retail decline

Although borrowers can access debt in most areas of UK real estate, there is one sector in which liquidity is very much under threat: retail. The country has one of the highest e-commerce penetration rates in Europe, at around 20 percent. Retailer retrenchments and insolvencies frequently make headlines, as do the struggles of UK retail real estate investment trusts like Intu, which has seen its share price collapse over the past year from 119p in February 2019 to 12p a year later as the value of its shopping centres has slumped. Official figures showing that consumer spending failed to increase for five months in a row to December have further darkened the already gloomy picture.

Despite a rapid decline in values, there have been relatively few examples of foreclosure and distressed selling, however. “I suspect that a lot of retail loans have been rolled forward because banks are thinking that the income is being serviced so let’s not rock the boat,” says Price. “We are starting to see equity players buying into shopping centres and getting leverage on those assets, but they are generally buying them as redevelopment opportunities in the mid-term.”

In some cases, the same bank that has previously lent against the asset may also be financing the new purchaser, says Rubinoff. “Those lenders are refinancing in order to turn a non-performing loan into a performing loan at an LTV which allows them to allocate less capital. It is covenant breach that creates the problem for them. We act for some private equity funds that own shopping centres and are benefiting from the rolling forward of loans on the basis that they have agreed with the lenders that the property is for sale. If you can find someone to buy it then that ultimately provides a solution and there are purchasers out there, although not necessarily at a price that sellers are yet willing to accept.”

White adds: “In the last couple of months we have seen a few transactions where banks are prepared to take a big writedown to get out of loans in the retail sector and clients have approached lenders like ourselves to see if we will take the debt on at a much-reduced level.”

He argues that not all parts of the retail sector are faring equally badly. “You have to really look behind the risk you are being asked to underwrite. We have done three retail warehouse loans in the last two months and we are comfortable about them because we look very carefully at tenants, lease lengths, debt yield, the type of location and community that it is serving, together with the alternative use.”

Hamilton fears that retail’s decline has much further to go. “The transition away from in-store retail has happened so quickly because of improving technology. Now, over 40 percent of online retailing is carried out via smartphones and tablets. It is generational – around 80 percent of under 35s do their clothes shopping online, but less than 50 percent of the over 50s. Consumer spending is shifting to the mobile-literate generation and as 5G technology gets rolled out I see this trend continuing.”

Political rhetoric

If little appears to have changed in post-Brexit Britain, that is because until the end of the transition period on 31 December the UK will have left the EU in name only. Choppier water may lie only nine-months distant.

MacDowel notes that, in the meantime, markets will remain highly sensitive to Brexit-related developments. “There has been a lot of political rhetoric over the last few days about regulatory alignment and if you look at the dollar against sterling it has dropped from $1.35 to $1.30 and may drop further. Any public announcement can still cause volatility.”

However, the participants agree that cycle risk will trump Brexit risk in the minds of most investors and lenders. Hamilton remains optimistic about the future of the UK real estate financing market. “We will probably see quite a healthy and liquid market through 2020. If the EU and the UK government take trade negotiations right down to the wire again then some investors may wait a few months in Q4, which will again create a temporary lull in activity followed by a bump the other side, but I think that three years down the line most investors have got their heads around Brexit,” he argues.

“They understand that Britain has a future. Is Brexit going to be economically negative? Maybe. Does that mean you should not invest in the UK? No. Especially with the currency devaluation it is still fundamentally a good bet in terms of risk and return.”

Around the table

Alex Price, chief executive, UK, Fiera Real Estate

Price leads the UK business of property investor Fiera Real Estate, which was rebranded from Palmer Capital following its takeover by Toronto-headquartered investment manager Fiera in April 2019. Fiera manages around $5 billion of real estate globally, about $1 billion of which is in the UK, and is invested through core and value-add strategies.

Alex Hamilton, corporate finance lead, Argent Related

Hamilton heads the underwriting team that analyses prospective and existing projects to evaluate viability and capitalisation strategy. The firm specialises in large-scale regeneration projects and is best known for the redevelopment of London’s King’s Cross district. In 2015, it formed a joint venture with US-based real estate firm Related Companies.

Jeffrey Rubinoff, partner, White & Case

Rubinoff is a partner in the law firm’s real estate finance group, working with a client list consisting of private equity houses, sovereign wealth funds, private property investors, listed property companies, banks and debt funds. The US-headquartered firm maintains more than 40 offices worldwide including a large London operation with more than 360 lawyers.

Richard MacDowel, treasurer, Quintain

MacDowel was recruited by Quintain in February 2019 to manage the UK property developer and investor’s requirements for third-party funding. The company is leading the regeneration of Wembley in London, building 8,000 residential units as well as retail and leisure sites. Previously, MacDowel was head of major private groups in the corporate real estate sector at Lloyds Bank.

David White, head of debt strategies, Tunstall Real Estate Asset Management

White is head of debt strategies at Tunstall, an M7 Real Estate company. The firm focuses on providing mid-market whole loans of between £2 million (€2.4 million)and £75 million in the UK. White has more than 30 years’ experience in banking, and previously held senior positions in the corporate real estate teams at Nationwide and Lloyds Bank.