Term Sheet: APG continues Australian debt push, DWS spies European price correction, Fitch envisions European CMBS market growth, IWG disappoints the markets, European ESG-linked bond issuance outpaces the US

Dutch pension giant commits to Australian debt market; DWS foresees prime values dropping by 10 percent to 15 percent; Fitch Ratings sees European CMBS market grow as US investment interest increases; IWG disappoints as flex occupancy growth slows; Savills warns recession will depress warehouse occupier demand; Société Générale agrees nursing homes deal in Germany and Spain; and more in today’s briefing, exclusively for our valued subscribers.

They said it

“There is a continued convergence of equity and debt returns which has become more evident in an increasing base interest rate environment.”

Graeme Torre, managing director and head of real estate for Asia-Pacific at APG, explains the appeal of Australian commercial real estate debt as it increases its commitments to the market. Read the full story here.

What’s happening

Green shootsAareal Capital Corp, the US lending arm of Wiesbaden-based Aareal Bank, is finding more borrowers are tapping into its green lending programme in its target region. The most recent example is SL Green Realty Corp, which last week obtained a $370 million syndicated loan from Aareal Capital. “Since the launch of the Aareal Bank Green Finance Framework for Lending in June 2021, we have seen a steady increase in interest and demand for green loans in all the regions we are currently active in, albeit from modest levels,” said Douglas Traynor, CEO of Aareal Capital Corp. The expectation is this will continue, with public companies taking the lead. “We have seen an increased interest in green lending from public REITs,” he added.

Corrective pricingDWS believes the European commercial real estate market has started a period of price correction, with a report published last week citing the impact of rising yields on prime values. The report outlined a future in which prime values could drop by 10-15 percent over the next year, with a commensurate impact on total. DWS does see some sector-specific bright spots, highlighting several housing niches as well as urban and niche logistics. The report offered an additional – if somewhat unexpected – potential area of growth. “In time, as price corrections are realised, office refurbishment and possibly retail positioning should gain in attraction,” the report stated.

Bespoke futureFitch Ratings sees a bespoke future for the growing CMBS market in the EMEA region, which is seeing increased interest from US investors. While there is a sense heavy competition among lenders is contributing to more customised structures than in the US, there is an equally strong sense this won’t happen stateside, according to a story published on Tuesday by affiliate title Real Estate Capital USA. “Would we expect US CMBS to adopt some of these EMEA features? We don’t think so,” said Steven Marks, a New York-based group credit officer at Fitch. This means a little extra work for US investors who want to dig into the region and figure out the impact of how differences like non-sequential pay structures and lower call protection affect their investments.Flexing downwardFlexible office space provider IWG’s share price fell 17 per cent early on Tuesday – before recovering to about 10 per cent down – as the group reported a higher than expected loss and Barclays, its house broker, slashed its expectations for the full year. The company, formerly known as Regus, posted a pre-tax loss of £70 million (€83 million) for the first half, compared with a £163 million loss a year earlier. The Financial Times (paywall) reported the latest loss was larger than Barclays had anticipated and the increased prospects of recession in IWG’s key markets in Europe, the US and Asia was likely to diminish demand for new office space and ultimately hit earnings, warned the bank. IWG chief executive Mark Dixon pointed to rising occupancy rates and revenues – up almost 25 per cent compared with a year earlier to £1.45 billion – as reasons for optimism. But with an increase in occupancy rates having slowed in the second quarter of the year, Dixon’s optimism failed to convince Barclays, which predicted revenue growth would follow suit. Still, lenders should watch this part of the market closely as flexible office space could be an early indicator of more companies and individuals returning to work, despite what is going on in the public markets.


The bullwhip effect…
In the last 12 months, firms have invested heavily in building inventories in response to major bottlenecks in supply, adopting a ‘just-in-case’ strategy that has seen companies hoarding stock. Record occupier demand put downward pressure on available vacancy and prime yields compressed to 3 percent in some European markets. But now global property adviser Savills is warning a “bullwhip effect” threatens to reverse this, prompted by signs that the demand for goods is slowing in the US. “This combination of a major inventory overhang and slowing final demand may result in a sharp reversal in net inventory accumulation through the bullwhip effect over the next 12-18 months. When combined with rising warehousing costs, this could derail the narrative around occupier demand that has attracted global investors to this once unfashionable asset class,” said Oliver Salmon, global capital markets, world research at Savills.

…But at the same time
PERE’s latest fundraising report shows that industrial continues to be the top pick for investors, with logistics heavyweight GLP leading the way. GLP was private real estate’s biggest fundraiser in the first half of 2022, reflecting investors’ growing interest in the logistics sector. The industrial sector also overtook multifamily to become the most popular strategy for sector-specific funds, raising a total of $13.6 billion during the period.

Data snapshot

ESG-linked issuance growsESG-linked real estate corporate debt in the first half of 2022 demonstrates how the financing strategy is becoming more dominant, according to Scope Ratings’ report. Bigger picture, the share of ESG-linked European non-financial corporate debt volume was 51 percent during the first six months of 2022, compared with 37 percent for 2021, according to data compiled by Bloomberg and Scope Ratings. Meanwhile, European ESG-linked bond issuance is outpacing the US market.

Loan in focus

Palacio de Leceñes in Valdesoto: one of Threestones’ Spanish nursing home assets

Nursing opportunity
French investment bank Société Générale has agreed a €53.5 million facility with Luxembourg-based Threestones Capital. The loan will fund the investment manager’s acquisition of six nursing homes in Germany and refinance two nursing homes in Spain. The properties, housed in its TSC FUND – EUROCARE IV investment vehicle, are all on long-term leases to leading care operators. The facility, which was arranged by Westfort Advisors, is the first cross-border commercial real estate debt financing in the nursing home sector this year. Threestones Capital portfolio manager Beka Pipia said the firm expected the demand by large institutions for the segment to continue to grow as they get “increasingly allured by the inflation-indexed cashflows and affirming demographic trends”.

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