Term Sheet: A €93bn debt funding gap, Arrow’s Maslow purchase, Aareal’s latest hotel deal

AEW’s latest forecast reveals a €93 billion refinancing shortfall for key European markets; Arrow Global doubles down on property lending with its full purchase of Maslow Capital; Aareal closes latest hotel deal in Copenhagen; and more in today's briefing, exclusively for our valued subscribers.

They said it

“These shifts always take longer than expected, but we believe that going into 2024, there may be a handful of owners which have to make some tough decisions”

Philip Moore, head of European real estate debt at US manager Ares Real Estate, has not yet seen forced selling in the market in any meaningful volume. But he expects this to change. Read more about the outlook for the market, including insight from Moore and others, here.

What’s happening?

Bridging the gap: AEW’s latest data reveals a €93 billion refinancing shortfall (Source: Getty)

A big, big gap
Estimating the difference between the principal volume of loans due to mature in the coming years and the amount of fresh debt available to replace it is no easy task. Manager AEW this week unveiled its latest attempt to do just that. In its first report on the subject, in September 2022, AEW considered the impact of falling loan-to-values in the market and forecast a €24 billion refinancing shortfall for the UK, Germany and France, for 2023-25. It expanded its analysis to factor the impact of lower interest coverage ratios on lender appetite, resulting in a report in January this year, which showed the 2023-25 gap was in the order of €51 billion.

Now, AEW has revised and expanded its analysis, taking in three more countries – the Netherlands, Spain and Italy. In addition, on the basis that many loans this year have been extended rather than fully refinanced, AEW has extended the timeframe of its analysis – keeping 2023 maturities in the picture but now including 2026 maturities.

The result is a €93 billion debt funding gap for the six markets in 2023-26, AEW said. While it is a huge volume of debt, AEW’s head of research and strategy, Hans Vrensen, said the industry is working “tremendously hard” in the background to restore loans and bring new and additional capital into transactions. Read full coverage here.

Sources view a growing role for debt funds in enabling developers to complete and stabilise their projects in a more difficult financing environment. Essen-based manager Aukera Real Estate last week provided a significant example of a financing that Patrick Züchner, chief investment officer at the firm, refers to as “bridge-to-exit.” Aukera provided a €130 million senior financing to Luxembourg firm Silverfinch Property & Asset Management, to fund the completion of Connection – a mixed-use development in the Grand Duchy. Züchner emphasised this type of financing, in this case for three years, provides developers with time and enables them to exit their schemes in, hopefully, more favourable market conditions. The deal hints at demand from developers with schemes close to completion for financing to replace construction loans and tide them over until longer-term financing can be obtained, or a sale can be completed.

Taking the rest of the pie
Credit investment firm Arrow Global has doubled down on its exposure to the UK residential financing market by fully acquiring London-based alternative lender Maslow Capital. Arrow initially bought a 49 percent stake in Maslow in December 2021, but last week announced it had bought the remainder of the firm following a period during which it had collaborated with Maslow to grow its loan book. “Acquisitions of this nature are accretive, especially as we continue to see opportunities in the residential housing market,” Zach Lewy, Group CEO and CIO of Arrow Global, told Real Estate Capital Europe. “With consumer demand for new homes on the rise and a systemic undersupply of housing stock persisting throughout Europe, these opportunities are ripe for investment.”

Slow summer
The latest report from property consultant Colliers shows investment activity, in the UK at least, remained limited this summer. In fact, in July, monthly investment volumes failed to reach the £1 billion (€1.2 billion) mark for the first time since the global financial crisis, Colliers said. In July, investment amounted to £940 million, 80 percent below the five-year monthly average of £5.1 billion. Year-to-date, investment stands at £21.1 billion, 54 percent below the corresponding 2022 number. But the consultant expects busier times ahead. “We expect a pick-up in Q4 when investor sentiment improves, and interest rates have peaked,” it wrote.


Source: Getty

The hunt for the missing number
Real estate owners face the prospect of needing to invest fresh equity into their assets as value declines push up loan-to-value ratios and lenders limit the amount of leverage they will provide at refinancing. However, a larger, but less talked-about, issue looms. The cover story of the forthcoming issue of Real Estate Capital Europe explores how property values today do not account for the costs of decarbonising asset, nor do they reflect the negative impact on value of an asset’s current lack of green credentials.

The dangers of this growing risk are explored in the deep dive article – published in our autumn magazine tomorrow, and online at www.recapitalnews.com on 4 September. Lenders, valuers and other debt experts share their views on this essential topic. Lisette van Doorn, chief executive of not-for-profit industry body, the Urban Land Institute, which is campaigning for a solution to the problem, provided the most unflinching analysis: “Lenders are financing real estate against a value that isn’t the real value of an asset. The value of some buildings is already much lower than its official valuation, as the cost of decarbonisation is not incorporated. We should not pretend this is not happening. These numbers are keeping people asleep.” Be sure to check out the full analysis.

Data snapshot

A subdued mood
The results of CREFC Europe’s Q3 sentiment survey show the industry body’s members were more negative about the outlook for aspects of the market, including the resilience of existing loan books, than they were three months ago. The chart below shows the sentiment index score, calculated to track shifts in overall sentiment. Read more about the survey results here.

Loan in focus

Tivoli Gardens, Copenhagen: Aareal financed a hotel in the vicinity (Source: Getty)

Aareal stays fixed on hotels
Some traditional banks went cold on the hospitality sector during covid-19, but Wiesbaden-based Aareal Bank has stuck with the sector. The lender’s €31.7 billion loan book is 35 percent weighted towards hotels – the largest segment. In its latest deal in the sector, Aareal this week announced it has provided a DKr769 million (€103 million) loan to hotelier Strawberry Group to finance its Villa Copenhagen hotel in the Danish capital. The loan was provided through the bank’s green finance framework. The five-star hotel, which opened in 2020 and contains 390 rooms, was built in the historic Central Post and Telegraph Head Office building, adjacent to the city’s Tivoli Gardens.

Speaking about Aareal’s focus on the hotel market, Patrik Lundström, general manager at Aareal Bank, said: “During corona, 80 percent of the hotels we financed were temporarily closed. We were always sure this asset class would recover. And we were right. Today, we do not have a single non-performing loan from that time.”

Today’s Term Sheet was prepared by Daniel Cunningham, with Mark Mwaungulu and Lucy Scott contributing