Term Sheet: An early refinancing, a market hindered by rising rates, an industry body’s ‘climate bubble’ concern

Sirius Real Estate’s early refinancing demonstrates how some sponsors are aiming to get their finances in order; EXPO Real participants describe a market hit by uncertainty around rising debt costs; the Urban Land Institute warns of a ‘climate bubble’ as it publishes valuation guidelines to factor in transition risk; and more in today’s briefing, exclusively for our valued subscribers.

They said it

“We’ve come out of a momentum market where there had been a lot of capital and it had been searching to deploy as actively as it can, into what we call ‘FOMAM’, which is the ‘fear of making a mistake’ in an environment of volatility

Roy March, chief executive at real estate investment bank Eastdil Secured, known to some as the industry ‘whisperer’, tells affiliate title PERE market participants are concerned due to the current situation in financing markets. Read his thoughts here.

What’s happening

Getting ahead of expiries
Amid uncertainty around how far rates will rise, some real estate borrowers are aiming to lock in financing now. Last week, Sirius Real Estate, which owns and operates business and industrial parks in Germany and the UK, announced the refinancing of a major debt expiry, a year early. The firm agreed a new, seven-year, €170 million facility with its lender, German bank Berlin Hyp, at a fixed rate of 4.26 percent. When the loan kicks in a year from now, the group’s weighted average cost of debt will increase from 1.4 percent to 1.9 percent.

Sirius added it has more than €138 million of available cash, and €35 million of debt due to expire within the next 12 months, which it is confident of “either extending terms with the existing lenders, replacing with new lenders or paying down”. As debt costs continue to rise, and lenders get more cautious, sponsors can be expected to take Sirius’s lead and attempt to get their finances in order.

Rate rises bite
With interest rate rises forming the headline topic of last week’s EXPO Real event in Munich, it is clear global macroeconomic uncertainty is taking its toll on the European property financing market. Real estate debt specialists in attendance said lending was substantially down across the UK and continental Europe due to interest rate unpredictability. UK government spending plans were a frequent topic of conversation at the event, with many fearing they could further fuel rate hikes, making it more difficult to bring inflation under control.

Lenders at EXPO reported difficulty pricing debt. But potential buyers have been equally blindsided. The sharp, rapid rise in rates has made financing costs substantially higher for many aiming to close investment deals, eroding returns assumed in some original investment cases. “Transactions are falling away as the returns do not look as good,” one debt adviser told Real Estate Capital Europe, adding: “It is chaos.”

No-go for Norges sale
Spiralling debt costs were cited by React News [pay wall] as one factor behind the collapse of Norges Bank Investment Managements’ €1.3 billion sale of Credit Suisse’s Swiss headquarters in Zurich. Korea’s KB Securities, an investment bank, and IGIS, an asset management company, had been in talks over the 1970s-built Uetlihof campus but the South Korean investor’s decision not to go through with the deal was understood to be due to market factors, and “principally” because of rising debt costs, React said.

OakNorth buys ASK stake
In the past five years, UK challenger bank OakNorth and specialist property lender ASK Partners teamed up to provide 45 structured finance transactions to small and medium-sized residential developers and property entrepreneurs. Now, OakNorth has bought a 50 percent stake in ASK. OakNorth said the deal will enable the companies to continue to provide funding comprising senior bank debt alongside other sources of capital. Ben Barbanel, head of debt finance at OakNorth, who will join ASK’s board, added: “The fintech platform [ASK] developed to enable institutional investors, family offices and high-net-worth individuals to participate in its transactions, enables fast subscription of loans and a strong network effect where many of its borrowers also end up becoming investors.”

LendInvest gets Lloyds backing
In another example of bank and specialist lender collaboration, London-based LendInvest announced in its trading update this week a £180 million (€205 million) partnership with Lloyds Bank. LendInvest said Lloyds will participate in the growth of its buy-to-let lending business and securitisation programme. In addition, LendInvest announced it has upsized the separate account it manages on behalf of US lender JPMorgan from £725 million to £1 billion. The announcements demonstrate bank appetite to back specialist property lending strategies in the UK.

Carbon bubble
The Urban Land Institute will warn the industry of a “carbon bubble” at its C Change Summit in Rotterdam today as it publishes its own valuation guidelines to help assess transition risk. The non-profit organisation believes current building values are too high because transition risks – which include factors such as the cost of decarbonisation – are not being factored into valuations. Its latest draft of the standardised disclosure method for assessing these costs, designed to help address the issue, will be published today. Read more here.


Tenants under pressure
In a time of rising inflation and interest rates, staying abreast of tenant default risk across property portfolios is critical. In a new report [read it here], data provider MSCI Real Assets examined the balanced funds within its MSCI Pan-European Quarterly Property Fund Index and found the traditional approach to analysing tenant default risk – with many focusing on only the top 10 tenants by rental income in their portfolios – may not be adequate. It found that, for most funds in its index, rental income is concentrated outside of the 10 largest tenants, meaning traditional analysis fails to capture the extent of risk. As macroeconomic conditions worsen, MSCI warned, having a full picture of tenant default risk will be increasingly important for investors and managers of property portfolios.

Staying stateside?
US investors are becoming cautious about lending and investing in the UK. While the pound has declined to historic lows against the dollar due to uncertainty over the UK government’s economic plans, this volatility has shifted perceptions about investing in the market, writes affiliate title PERE. “Outside the US, people right now are more trepidatious as there is just so much uncertainty in other markets,” Emmanuel Grillo, a partner at New York based law firm Allen & Overy who works with US clients investing abroad, told Real Estate Capital USA. “If [investors] are going to put their capital to work anywhere, they’re going to prioritise putting it to work [in the US]. Until some of the geopolitical headwinds sort themselves out, I think it’s going to be a much more conservative marketplace and you’re not going to see as many deals get done.”

People move

New hire: Emma Parr joins as managing director and general counsel (Source: Birchwood)

Birchwood hires from Get Living
In an interview with Real Estate Capital Europepublished in September, Lorna Brown, founder and chief executive of Birchwood Real Estate Capital – a new lender backed by US insurer WR Berkley – outlined two intentions: “Doing a good job for our investors and borrowers, while seeking to build a culture that supports women joining the industry and, more importantly, remaining in the industry.”

Birchwood was set up in June, with Brown joined by director of real estate strategies, Kate Tovey, with whom she had worked for five years at Delancey and LGIM Real Assets. Surveyor Carole Cook, formerly of Cushman & Wakefield’s City of London investment team, also joined the new team. Now, Birchwood has hired Emma Parr as managing director and general counsel. Her LinkedIn profile is here. Parr was previously general counsel at residential owner Get Living, and has also held roles at law firms including White & Case. “Our team’s long-standing connections through our previous roles have enabled us to navigate a vast array of corporate situations in multiple complex environments,” Parr said about joining Birchwood.

Data snapshot

Risky business
Investors surveyed in September by industry body INREV – the European Association for Investors in Non-Listed Real Estate Vehicles – unanimously agreed investment risk is higher.

Loan in focus

Lexington: Refinanced by Deutsche Bank (Source: Apache Capital)

Deutsche’s Liverpool loan
In another notable example of refinancing, the parties behind The Lexington, a 325-unit build-to-rent tower in Liverpool, last week announced they had secured investment finance to replace legacy development debt. Residential-focused manager Apache Capital announced that, alongside its joint venture partners, manager Harrison Street and insurer NFU Mutual, it had sourced a £70 million loan from Deutsche Bank for the £115 million-gross-development-value scheme on the city’s famous waterfront.

The Lexington, which completed in 2021, was the first operational development for the partners’ UK BTR platform, which launched in 2018 to fund delivery of assets developed and is operated by UK-based Moda Living. In its announcement, Apache said the scheme has reached stabilisation on a let and reserved basis. It added the deal demonstrates that debt can be found for high-quality assets, despite challenging market conditions.

Today’s Term Sheet was prepared by Daniel Cunningham, with contributions from Lucy ScottJonathan Brasse and Samantha Rowan