The story of 2016: Part Two

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

2016 was neatly dissected by the event which arguably defined the year for the European property debt markets; the UK’s vote to leave the European Union. If the first half of the year was characterised by investors and lenders anticipating the potentially seismic referendum, the latter half was all about how market participants dealt with the fall-out.

In the immediate aftermath of the Brexit vote, real estate finance market players attempted to put on a brave face, display a ‘keep calm and carry on’ attitude and repeatedly insist that this was “not 2008”.

Property finance professionals braced themselves for lenders attempting to raise margins and dial down loan-to-value ratios in a bid to price-in the increased risk of doing business in the UK. Several investment managers called a halt on redemptions from their open-ended UK real estate funds, promoting what turned out to be unfounded fears of a damaging fire-sale of UK property. In the event, properties sold at a relatively shallow discount and the market continued to function, albeit nervously.

During July, in a Brexit-defying deal, a club of banks led by Wells Fargo provided more than £500 million for the development financing of Brookfield Property Partners’ 100 Bishopsgate tower in the City of London. The deal was well underway by the time of the referendum and it funded a prime office tower for a core sponsor, with substantial pre-lets. However, by committing so soon after the referendum, the deal was a vote of confidence for London.

That said, during the summer, bankers in the UK admitted that certain parts of the market had pretty much ground to a halt, while those seeking to finance opportunistic post-Brexit investors insisted that they were keeping busy during the traditional ‘summer slowdown’.

Figures published in August by Dealogic showed that the European syndicated real estate loan market had its weakest first half of a year since 2013 during H1 2016, with syndicated real estate loan volumes totalling €20.7 billion, down 41 percent year-on-year.

As Q3 drew to a close, Real Estate Capital held its Finance Forum Europe in London. It was an apt point at which to take stock, and delegates heard that the volume of capital from lenders aiming to finance real estate had dropped “significantly” in the wake of the UK’s vote to leave the EU.

In October, pan-European industrial specialist P3 closed the year’s largest financing, a €1.4 billion deal to fund its Europe-wide portfolio with a club of banks including Morgan Stanley and pbb Deutsche Pfandbriefbank. Singapore’s GIC later bought P3.

During that same month, a report by CBRE showed that returns from UK senior debt had stabilised in the first three months after the Brexit vote, but that more volatility was likely in the coming months. The De Montfort report on the UK CRE debt market showed that new lending dropped by 13 percent during the first half of 2016, reflecting the pre-Brexit jitters.

The German real estate debt sector remained uber-competitive. In October, a report by the German Debt Project showed that downward pressure on German real estate loan pricing could persist, with a survey of the country’s lenders showing that an 8 basis points decline was expected by the end of the year.

In the same month, TH Real Estate, on behalf of TIAA’s Cityhold Office Partnership with two Swedish pension funds, refinanced a portfolio of core offices, mainly in Germany. In an indication of how tight the market remained, ING and LBBW’s circa €300 million loan was understood to be priced below 100 basis points.

There was major M&A news in November as Starwood sold its European real estate debt advisory firm Hatfield Philips International (HPI) to rival servicer Situs. Adding HPI’s $15 billion of total assets under management takes Situs’s European AUM to over $40 billion and combined global AUM to $160.6 billion.

In November, the shock result of the US election, which saw Donald Trump triumph, reverberated across the Atlantic. As the market digested the news that a property developer who had never held public office would be leader of the Free World, the consensus was that there is plenty more uncertainty ahead on a global scale.

In the UK, the fledgling private rented sector (PRS) residential market came into sharp focus in the latter part of the year. In November, developer Quintain secured an £800 million financing package from a club of lenders led by Wells Fargo, which as well as financing it at the corporate level, provided development finance for its Wembley Park development, which contains a large quantum of PRS flats.

Meanwhile, Venn Partners, which manages the £3.5 billion government-backed PRS Guarantee Scheme, also started to issue bonds to fund schemes. The UK PRS sector remained a point of discussion as to whether or not it would meaningfully emerge any time soon.

In people news, Starwood announced in December that well-known debt man Peter Denton was to leave the company to join a property-related not-for-profit organisation in the New Year as chief financial officer. Denton had joined Starwood ahead of the launch of its listed property debt fund in 2012. In the same month, German bank Helaba announced that Jürgen Fenk, one of the best-respected real estate finance leaders in Germany, was to leave his position on its board of managing directors next September to pursue other roles in real estate.

December saw the closing of one of the year’s largest and most ambitious financing deals. Aareal Bank underwrote a €610 million ten-year refinancing of Invesco Real Estate’s pan-European open-ended property fund, in a deal which has provisions to extend it to €1 billion.

German insurer Allianz was lined up to take the majority slice of the loan – €366 million – as the two organisations reprised the collaboration they first put into practice with a €630 million financing of NorthStar Realty’s pan-European office portfolio financing in 2015. The deal showed that banks and institutional lenders are prepared to work together to provide large-scale, complicated cross-border and multi-currency financings.

By the end of the year, ING and LBBW announced that they had eventually syndicated their £400 million, financing of the Salesforce Tower in the City of London, which had closed in April. Eight banks were rounded up for the syndication, of which six were new to the UK finance market, and six were Asian, including three Taiwanese banks.

The year ended with some significant loan sales agreements. In December, Ireland’s National Asset Management Agency (NAMA) picked preferred bidders for two major loan-books; the circa €3 billion Project Gem and the circa €1.5 billion Project Tolka. Cerberus Capital Management, a perennial buyer of Irish loan books, won Gem, while Tolka went to fellow US investor Colony Capital.

The sales further underlined the gradual culmination of the deleveraging of Ireland’s non-core property debt pile, which began in earnest back in 2011.

As 2016 drew to a close, real estate finance market players had a lot to ponder for the coming year. In Europe, a major question mark remained over how Brexit would play out, while looming elections in the Netherlands, France and Germany ensured that uncertainty across the continent was to continue.