Starz backs regional UK offices in £77m loan deal

The mid-market lender expects busy months ahead as sellers accept challenging market conditions.

Starz Real Estate, the London-headquartered alternative lender, has signalled its confidence in the UK regional office park market with a £77 million (€91 million) loan for a business park in the southern English county of Surrey.

Starz provided the senior facility to manager PineBridge Benson Elliot for the refinancing and part redevelopment of Guildford Business Park.

The four-year facility comprises a £58 million term loan and a £19 million capex facility designed to fund the refurbishment of one of the properties to deliver a 107,000-square feet, net-zero carbon, BREEAM ‘Outstanding’ building by 2024.

Nine tenants occupy Guildford Business Park, a 14-acre office park comprising 287,176 square feet over five office buildings. The asset is located on the edge of Guildford town centre, 28 miles from central London and is adjacent to the University of Surrey.

David Arzi, chief executive of Starz, said the lender, which has issued £279 million of loans in 2022, was interested in undertaking loans against high quality office space.

“There is a lot of noise around the office market. But there is a need for high quality office space, where there is demand for high quality, energy efficient properties that are surrounded by amenities,” explained Arzi.

Arzi added that supporting the borrower’s plan to upgrade one of the buildings on the park to BREEAM ‘Outstanding’ was an added draw for the lender owing to “regulatory drivers” that are pushing landlords to meet improved levels of energy efficiency.

“A lot of older stock will fall by the wayside as sponsors won’t want to spend capex on those properties. We also know that large tenants want to be ESG compliant. Every tenant should be concerned about reducing energy costs today; this is another factor that will drive tenants to better office space.”

Starz typically offers loans at a loan-to-value of between 60 percent to 75 percent. It tends to issue senior loans of between €15 million and €100 million across traditional property types but also holds exposure to private rented sector residential, student and affordable housing.

Arzi is anticipating a busy fourth quarter as property owners accept that the interest rate environment will not improve. “The change in interest rates have slowed down sales activity. But I think now prices will readjust as sellers get used to the new dynamic of higher interest rates and a softer economy,” he explained.

“There is a pent-up demand to sell now since sponsors had been put off selling assets due to covid. But sellers will have to move on as interest rates are not getting dramatically lower any time soon. Holding an asset is not going to do anyone any good.”

Arzi said he thought that while he did not expect major distress in the commercial real estate market, he did anticipate lower expectations on sale price, with a change in valuation of around 10 percent to 15 percent. Hotels, he argued, may experience less of a price shift as they have benefitted from a resurgence of travel.

PineBridge Benson Elliot was advised by HSF and Starz was advised by Eversheds Sutherland and Carey Olsen. Savills provided valuation services.