The story of 2016: Part One

In this first part of our retrospective of 2016, Real Estate Capital revisits the key stories which shaped European real estate finance during a tumultuous year.

In this first part of our retrospective of 2016, Real Estate Capital revisits the key stories which shaped European real estate finance during a tumultuous year.

At the start of 2016, the talk in the European real estate finance market was of ‘headwinds’. After a buoyant first three quarters of 2015, market players had become more cautious during the latter part of the year.

The impact of the stock market crisis in China had been felt in Europe, not least in its impact on the capital markets and therefore lenders’ options for exiting their real estate loans. Closer to home, the Greek economic crisis had fanned fears for the future of the European Union.

In European real estate circles, especially in the UK, many were beginning to ask whether values were looking a little ‘toppy’ and whether the market was reaching the peak of the cycle. By January 2016, investors, and lenders, were already proceeding with caution.

That said, big deals continued to be done and the property debt markets seemed to be functioning nicely. In January, Oxford Properties and Brockton Capital sealed their joint venture to speculatively develop The Post Building office scheme in central London and closed a £230 million financing with BNP Paribas and pbb Deutsche Pfandbriefbank. The deal showed that lenders remained keen to finance the best deals, even if they were speculative developments.

Banks also proved eager to hunt for prime financing deals across the continent. In February, ING Real Estate Finance provided a €280 million loan to finance the purchase of a prime Madrid office tower by the billionaire Philippines-based investor Andrew Tan. In March, Bank of America Merrill Lynch (BAML) provided a €575 million loan to refinance the Certeum portfolio of Finnish logistics properties, which is majority owned by Blackstone and sits within its Logicor platform.

On 20 February, the then UK prime minister David Cameron announced that the UK’s in/out referendum on European Union membership would take place on 23 June. The announcement sparked a flurry of speculation, and added another reason for investors and lenders to be cautious.

Early on, however, most expected that the UK would vote to stay in the EU. Indeed, the big question doing the rounds in the market was whether the investment pause which marked the months leading up to the vote would be followed by a bounce once the public voted remain.

A pleasing view of Cannes but Europe-wide worries were on the horizon at MIPIM
A pleasing view of Cannes but Europe-wide worries were on the horizon at MIPIM

In March, as the property sector decamped to MIPIM in Cannes, talk of Brexit could be heard up and down the Promenade de la Croisette. One senior German banker, Aareal management board member Dagmar Knopek, admitted that a potential ‘Brexit’ was already affecting real estate. “The Brexit decision is something that everyone is looking at – and which already influences investment decisions,” Knopek told Real Estate Capital.

The question of whether the European real estate market had peaked was also frequently asked at MIPIM. One delegate joked that the sheer number of be-suited drinkers packing popular watering hole Caffe Roma perhaps indicated an overheated market. Most, though, argued that there are a couple of years’ growth left in Europe.

ING and LBBW did not seem too fazed by the upcoming UK referendum when in April they jointly underwrote a £400 million refinancing of the City of London’s Salesforce Tower, the building formerly known as the Heron Tower. In May, Morgan Stanley provided a £320 million senior loan to Blackstone to refinance its Devonshire Square mixed-use estate in the City of London.

During May, BAML continued its attempts to single-handedly revive Europe’s CMBS market. BAML launched the circa €230 million Taurus 2016-2 DEU, secured by a German portfolio owned by Canada’s Dream Global REIT. The deal followed the first CMBS of 2016, the €317.05 million Taurus 2016-1 DEU, which BAML launched in March, securitising a German portfolio owned by Blackstone. Despite BAML’s efforts, CMBS remained side-lined in Europe during 2016.

Also in May, a major development financing deal was signed in London with a new entrant to the European real estate finance sector. The Children’s Investment Fund (TCI) wrote a circa £400 million loan, backing Almacantar’s Marble Arch Place scheme, Real Estate Capital revealed.

Fears for Europe's future mounted as the UK referendum loomed
Fears for Europe’s future mounted as the UK referendum loomed

As June approached, real estate market players could talk of little other than the UK referendum. In Land Securities’ results, the UK REIT’s chairman, Robert Noel, had his say: “We believe a vote to leave the EU would lead to business uncertainty while negotiations take place on an exit treaty. An exit could be painful for the property industry and those it supports.”

The De Montfort University report showed that the total value of outstanding commercial real estate debt in the UK had grown for the first time since 2008, by 1.9 percent during 2015. As the referendum loomed, some feared a ‘leave’ result would curtail future lending activity.

Requests for large real estate acquisition loans in the UK market halved during the first quarter of 2016, possibly reflecting the market pause ahead of the referendum on the UK’s membership of the EU, according to debt advisor Laxfield Capital. Acquisition finance of more than £50 million accounted for 51.8 percent of borrower requests by volume during Q4 2015, but dropped to 25.9 percent in Q1 2016, according to the firm’s UK Debt Barometer.

However, significant financing deals continued in the UK up until the referendum. In June, Intu Properties arranged a new bridging loan for its £410 million acquisition of the remaining 50 percent of Birmingham’s Merry Hill shopping centre. Deutsche Bank and HSBC, which provided a previous £191 million loan for intu’s original 50 percent stake, have increased their exposure in a new £500 million loan.

Across Europe, large financings continued to be closed. Aareal Bank provided a €368 million loan to finance a logistics property portfolio in Germany. The loan was provided for a term of 10 years to a 50/50 joint venture between Allianz Real Estate and the Belgian logistics property developer VGP NV.

In the loan sales market, 2016’s defining deal came in late June. Lone Star and JPMorgan struck a deal to buy the Dutch ‘bad bank’ Propertize for €895.3 million, representing the largest sale of legacy real estate loans in the Netherlands to date. In one fell swoop, the bulk of the Netherlands’ non-core real estate debt pile was traded.

The market braced itself for 23 June and the referendum which had the potential to shape the political and economic future of Europe. While most in the market were expecting, and hoping for, a ‘remain’ vote, the UK’s decision to leave the EU came as a major shock. Suddenly, talk of market ‘headwinds’ was replaced by a deep sense that the market was entering a prolonged period of unprecedented uncertainty.

The second part of our 2016 retrospective will follow on 27 December.