They said it

“The fact that we often expect what happens in the US today to happen [in Europe] tomorrow can be self-fulfilling”

Peter Cosmetatos, chief executive of industry association CREFC Europe, warns against drawing conclusions about European real estate lending based on US regional bank failures in the summer issue of Real Estate Capital Europe, published today

What’s happening?

Another canary in the coal mine 
More evidence of troubles in the office sector have surfaced in a note issued on 30 May by credit ratings agency Moody’s. The ratings agency has downgraded Canary Wharf Group Investment Holdings, the owner of London’s Canary Wharf to Ba3 from Ba1.

Moody’s said tough funding conditions for real estate companies in the next 12 months would mean CWGIH, jointly owned by Qatar Investment Authority and Brookfield Property Partners, will struggle to improve the company’s “already weak credit metrics”. Moody’s is also concerned about “elevated refinance risk” in relation to £1.4 billion (€1.6 billion) of debt that requires refinancing in 2024 and 2025. CWGIH’s “high reliance” on asset disposals to deleverage and repay upcoming maturities is also of concern for the agency, which said cautious investment markets make it tricky to sell assets without “offering substantial discounts”.

The downgrade comes one week after a syndicate of lenders placed 5 Churchill Place, a 313,000 square foot office on the Canary Wharf estate, into administration. The building’s owner, Jovial Link Holdings, is part owned by Li Ni Yao Chen, a Hong Kong tycoon – whose other investment on the estate, 20 Canada Square is currently being marketed for £250 million, less than the £265 million loan held against it. For insight into the outlook for Europe’s office market, read here.

Early bird catches the worm 
Sirius Real Estate, the listed owner and operator of business parks in Germany and the UK, has completed a refinance of debt due to expire in seven months. The €58.3 million facility, agreed with Deutsche Pfandbriefbank, runs for a seven-year term at an all-in fixed interest rate of 4.25 percent. The fresh arrangement extends the group’s total weighted average debt expiry from 3.3 years to five years, and on its commencement in January 2024, Sirius’s weighted average cost of debt will increase from 1.4 percent to 2.1 percent. It is the second time in recent months the company has refinanced in a timely fashion. In October 2022, the company secured a €170 million facility with German lender Berlin Hyp, replacing debt that had been due to expire this October.

This time, it is different  
The journey to better days for the commercial real estate markets will require pricing discovery via “hand-to-hand combat” between borrowers and creditors, writes Julian Salisbury, chief investment officer of asset and wealth management at Goldman Sachs in the 29 May edition of the Financial Times. As property markets are confronted with “multiple negative factors” – such as higher interest rates and weak office demand – Salisbury does not foresee a clear path to refinancing the loans coming due, loans that “the bank, bond and insurance markets do not have the capacity nor appetite to accommodate”.

While Salisbury acknowledges that pricing resets are commonplace, he says  “this time feels a bit different”, explaining that structural changes in the way people occupy space mean a recovery is unlikely to follow its usual course. “Lenders will find it harder to extend bad loans to a better day, pretending they are in better shape than they are, given the significantly higher carrying costs and capital needs of most property,” he added.

Yet another silver lining  
In recent months, Real Estate Capital Europe has seen more than €6 billion worth of proposed debt funds coming to the market as alternative lenders seek to bridge a funding gap, estimated by manager AEW to be around €51 billion in the UK, Germany and France alone. Frankfurt-based property asset management firm Silverton Group is the latest company seeking to capture such opportunities. The property asset management firm is working on plans to enter the real estate debt space with its first commingled property credit fund, after revisiting longstanding ambitions to launch a credit vehicle. Speaking to Real Estate Capital Europe, Jascha Hofferbert, partner at Silverton, said the company is working towards launching a €200 million whole loan and mezzanine debt fund in 2024.

Trending

German lender malaise  
Stuttgart-based specialist real estate adviser BF.direkt has reported a flatlining of loan issuance for the vast majority of the 110 German property finance providers it surveyed for its latest BF.Quartalsbarometer. Lenders are also displaying increasing reticence to finance office development, as well as construction in the logistics and retail sectors, although there was more optimism around hotels. The report showed that margins have reached their highest level since the inaugural survey was released in Q4 2012, with the average rate in portfolio financing growing from 235.1 basis points during the previous quarter to 245.1bps today, while the average margin for property developments has grown from 337.1bps to 342.3bps.

Spring slump 
UK investment volumes slumped during April to £1.7 billion (€1.97 billion) from the £4.6 billion transacted during March, according to property consultant Colliers’ latest UK Property Snapshot report. The latest figures also represent a 68 percent decrease on the five-year monthly average of £5.2 billion, the company said.

The sectors that attracted this capital were industrial, which accounted for 42 percent of all deals by value, followed by residential, which took 27 percent of investment. But offices, which captured 14 percent of the money, slowed between March and April – from £910 million to £240 million. Colliers said that during the first quarter of 2023, the investment volume for the sector was 65 percent below the same period in 2022.

Data snapshot

An uneven gap
In its latest monthly research report, manager AEW identifies the German retail sector as having the highest debt funding gap between 2023 and 2025, in comparison with the retail sectors of other European markets. Most of the refinancing gap, it said, is attributable to the price correction in retail that took place between 2018 and 2023.

Loan in focus

Homes for Ukrainians
The European Bank for Reconstruction and Development (EBRD) has provided a €50 million loan to the Nordic manager NREP to finance two Warsaw residential rental projects that will be made available to Ukrainian refugees. The international lender, which was established in 1991 to help Central and Eastern European nations in the post-Cold War era, said the project was approved under the EBRD’s Resilience and Livelihoods Framework – set up to help Ukraine and other countries affected by the Russian invasion.

NREP’s housing units will, it said, help address a “chronic” supply shortage that has intensified following the arrival of 1.5 million Ukrainian refugees in Poland since the invasion started in February 2022. The company, which has €19 billion of assets under management, supports refugees with access to leases of its homes, such as streamlining the vetting process for Ukrainian citizens.

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