Syndication lull reflects disjointed market

The significant drop in the volume of syndicated loans in the first half of 2017 stands in contrast to increased property investment figures.

The significant drop in the volume of syndicated loans in the first half of 2017 stands in contrast to increased property investment figures.

The striking decline in the volume of syndicated real estate financing volumes during the first half of 2017 would make sense given the backdrop of uncertainty in the eurozone – if it wasn’t for an overall increase in property investment activity during the same six-month period.

In total, syndicated borrowing stood at €16.5 billion – the lowest first-half volume since 2013 when €7.1 billion was recorded – according to the latest figures released by data provider Dealogic. With only 79 syndicated deals closed across EMEA in H1 2017, activity was down by a quarter, year-on-year.

This is in stark contrast to investment activity. Despite the uncertain backdrop created by the ongoing Brexit situation and contentious elections in France and the Netherlands during the period, the commercial real estate investment markets proved to be relatively resolute. Figures from JLL show that EMEA direct commercial property investment volumes totalled €97 billion, up 7 percent on H1 2016. In the UK market, the first-half total was £26 billion (€28 billion), up 4 percent year-on-year.

With commercial real estate investment levels up, it might be assumed that debt provision, and therefore syndication, would also receive a boost. Dealogic’s figures dispel that. So, what has held syndication activity back?

Investment volumes were boosted by a handful of mega-deals, the financing of which went to clubs as sponsors aimed to drive the financing process themselves. This was particularly seen in the financing of acquisitions made by Asian buyers. There has also been an increase in investment funded through equity, with a limited degree of leverage applied.

The UK market was a case in point. It witnessed a significant drop in syndicated loan volumes – down from €7 billion to €3 billion year-on-year. The Brexit effect was no doubt at play. The fall in the value of sterling has played into the hands of overseas buyers, with Asian players behind some mega-deals for trophy assets in London, including Hong Kong’s CC Land buying the Cheesegrater skyscraper for £1.15 billion in May.

A Europe-wide mega-deal that boosted the investment figures was the acquisition by China Investment Corporation of Blackstone’s European logistics platform Logicor for a stunning €12.25 billion in June.

In the case of Logicor, the €6.8 billion club financing by Bank of China and China Construction Bank was done in Asia and does not qualify for the Dealogic EMEA figures. The £644 million Cheesegrater financing was a club deal and as such would not feature in the data provider’s syndicated bookrunner rankings.

Aside from the mega-deals, banks focused on smaller financings during the first half of the year, which would not be meaty enough to warrant syndication. As one syndication banker noted: “This means a significant amount of bilateral transactions have gone below the syndication radar.”

Alternative lenders’ increasing appetite to originate large financings is also having an impact on syndication, with some insurers unable to then sell down their loans. Allianz, for example, is originating big-ticket deals, such as its recent €290 million financing of Dublin’s Liffey Valley mall. The German insurer cannot syndicate loans due to regulatory burdens for insurers lending directly through their balance sheet, which means less debt hitting the syndication market.

France was an interesting case. Dealogic’s figures show that syndicated volumes increased by 33 percent year-on-year to €5.4 billion – this was despite muted investment activity during the period, in the run-up to the country’s presidential election. Activity was boosted by a combined €2 billion of syndicated debt across loans provided to French real estate services firm Foncia and to Carmila, the property unit of Europe’s largest retailer Carrefour.

This shows that there is not necessarily a straightforward correlation between investment volumes and syndication activity. For syndicating banks, the right type of deal is crucial. As some of the large big tickets in Europe have gone to Asian-led clubs, further relationship-driven syndications outside EMEA are likely. In addition, equity-laden investors benefiting from currency fluctuations will keep shaping an evolving market.