They said it
“This is by far the most serious looming issue”
Elon Musk, chief executive of Twitter, Tesla and SpaceX, responds to a tweet from capital markets commentary provider The Kobeissi Letter outlining that refinancing $2.5 trillion in commercial real estate debt in the next five years will likely lead to the next major economic crisis.
Bank on uncertainty
Events in the global banking sector continue to unnerve European real estate debt professionals. Friday’s alarming drop in the share value of Deutsche Bank sparked fears the banking crisis – which began with the failure of three US regional banks and led to the rescue-purchase of Credit Suisse by UBS – was spreading.
The Deutsche situation was sparked by a spike in the cost of insuring its debt against default. By Monday nerves steadied as its share price recovered. Wobbles in the banking sector have so far had a limited direct impact on European property lending. However, they do add uncertainty to a market already grappling with repricing and rising rates.
More turbulence can be expected. As Paul Ashworth, chief US economist at analyst Capital Economics, put it: stresses on small US banks could create an “adverse feedback loop” in commercial real estate, causing more defaults, a fall in capital values and a further tightening in lending standards.
Banking sector fears also subsided somewhat with the reported acquisition of one of the three failed US lenders, Silicon Valley Bank, by First Citizens Bancshares, one of the country’s largest regional banks. The deal, expected to see First Citizens take control of $56.5 billion in deposits and $72 billion of SVB’s loans at a steep discount, has created a short but welcome sigh of relief for the financial markets. Share prices of regional banks in the US that had been affected, including First Republic, have rebounded, just like Deutsche’s.
Italian loans concerns
Credit rating agencies have flagged concerns over five securitised Italian retail loans linked to properties owned by funds managed by Blackstone. The US manager says everything is in hand and that it expects to fully repay the debt. Indeed, all the loans are performing, and it is understood the debt yield across the two sets of loans has improved in the past year. However, the loans have been extended multiple times.
In February, Fitch Ratings, concerned by weak consumer spending and a more challenging refinancing environment, downgraded its ratings on multiple tranches of the commercial mortgage-backed securities loans in Pietra Nera Uno and Deco 2019-Vivaldi. Euan Gatfield, managing director in Fitch Ratings’ structured finance group, told Real Estate Capital Europe it sees a “real possibility” of the loans defaulting and having to be taken over by a special servicer. Keep an eye out on recapitalnews.com for the full story.
Arrow surpasses target
Opportunities in the real estate sector will feature prominently in London-based manager Arrow Global’s strategy as it aims to deploy from its latest credit fund. Arrow smashed its €2.5 billion target for its Arrow Credit Opportunities II fund, closing the fund on €2.75 billion. The firm, which was founded in 2005 in the UK as a debt purchase company, will target a range of asset-backed credit opportunities.
Arrow’s business model is for platforms in which it has an equity interest to originate off-market investment opportunities on its behalf. For example, in January 2022, it acquired a stake in UK development lender Maslow Capital, which is looking to draw on the capital provided by ACO II to grow its loan book this year by £900 million (€1 billion).
Slate eyes European lending
Europe’s real estate lending market continues to turn heads as non-bank organisations see an opportunity to take advantage of a more cautious approach from banks. Toronto-based real assets manager Slate Asset Management is exploring the option of expanding its real estate credit business to Europe, two years after entering the US property debt market.
In 2021, affiliate publication Real Estate Capital USA reported its expansion into the US real estate debt market with the acquisition of New York-based Annaly Capital Management. An industry source with offices in Europe and the US told Real Estate Capital Europe that Slate is looking to hire personnel to create a parallel property credit business in Europe. On the equity investment side, the firm has already deployed €2.1 billion in transactions across the region.
Cale Street, the real estate investment and finance firm backed by the Kuwait Investment Authority, is aiming to buy back commercial mortgage-backed securities in the Derbion shopping centre in the English Midlands city of Derby, previously known as Intu Derby, commercial real estate news service Bisnow reported last week. Cale Street has launched a tender offer for up to £50 million (€56.9 million) of a £131 million loan secured against the centre.
The company bought a 50 percent stake in 2019 and took complete ownership in 2020, when retail owner Intu went into administration. In August 2021, during the pandemic, it agreed a deal with lenders to waive loan covenants, Bisnow reported. It added Cale Street offered to buy senior bonds at 92.5 percent of nominal value and junior bonds at 84 percent.
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A Sternlicht warning
Barry Sternlicht had harsh words for the Federal Reserve, following the US central bank’s decision to raise the federal funds rate by 25 basis points last week. “By raising interest rates, they’re only increasing the losses for the regional banks, which means they’re still going to have to go and borrow additional capital from the Fed,” he said during an interview with CNBC’s Squawk Box.
The Starwood Capital Group chairman added that it will be difficult for large money-centre banks like JPMorgan and Bank of America to replace regional banks – which account for the majority of commercial real estate loan originations – given their own exposure limits to commercial real estate.
“I just wonder who on earth is going to refinance that office building on Park Avenue,” Sternlicht said. “And I think if you take that to its logical conclusion, values will drop.” That in turn will have devastating consequences for municipalities that rely on tax receipts from real estate to pay for their services. “You do not have to see the car hit the wall to know that it’s going 8,000 miles an hour and that it will hit the wall.”
CMBS under pressure
European commercial real estate loans securitised in the 2017-18 period have reached their final maturities, although the sponsors of six loans in four European commercial mortgage-backed securities transactions have been forced to seek maturity extensions to prevent refinancing failures, according to a note from Berlin-based credit analyst Scope Ratings. The firm added the same threats are being felt across the €300 billion commercial real estate debt market amid the sharp decrease in liquidity provided by banks.
Scope highlighted three Italian CMBS deals, including Taurus 2017-1 IT, which reached its extended maturity in November 2022, but has been unilaterally extended by the servicer to January 2024 with an option for another year. It added the same servicer has also extended the three loans securing the Pietra Nera Uno CMBS, discussed above, for a year.
Energy regulation tightening
From this Saturday, it will be unlawful for landlords to continue to let commercial properties in England and Wales with an Energy Performance Certificate rating of ‘F’ or ‘G’. Law firm Linklaters has warned that while landlords have had since 2018 to ensure that their buildings meet this new requirement, it expects some to be behind on the new rules across various sectors across the UK, including office and retail.
Rory Bennett, Real Estate ESG Lead at Linklaters, told Real Estate Capital Europe: “There seems to be a general lack of awareness amongst landlords (and tenants), through no fault of their own, of the impending 1 April deadline… Consequently, this date will slip by with many landlords not having, technically speaking, secured compliance.”
On the rise
Borrowers in Continental European markets are paying all-in rates of up to 6 percent for loans on prime properties, according to London’s Bayes Business School. In a pilot report, it found debt costs in key continental markets had risen from 2-3 percent to 4-6 percent in the past year. Read more here.
Loan in focus
Santander backs Warsaw development
Santander Bank Polska, the Polish arm of Spanish bank Santander, has provided a 125 million zloty (€27 million) construction loan for a residential scheme to Polish developer Real Management. The financing package will be used to fund the construction of the 300 unit-Neo Natolin scheme, located in Warsaw. The first stage of the project comprises 84 high-end semi-detached houses – which will be delivered by the firm as early as Q3 2024.
In January, Real Estate Capital Europe reported Santander was involved in the largest single-asset loan in the history of the Polish commercial real estate market – a €475 million refinancing package for HB Reavis’s Varso Place in Warsaw.