Term Sheet: Bayes report highlights refinancing, Blackstone’s next European CMBS, LaSalle’s fundraising drive

Volumes down, refinancing up

The results of the H1 2023 Bayes Business School UK commercial property lending survey were published this week. The report [full coverage here] provided crucial insight for an uncertain market. Here are three key takeaways.

1. Lenders kept busier than buyers: at £18.8 billion (€21.7 billion), lending volumes were 22 percent down on H1 2022. Although that was a significant drop, it was less sharp than the 53 percent reduction in investment volumes in H1, recorded by consultant JLL. Amid such a decline in investment, only 34 percent of loans backed acquisitions.

2. Incumbent lenders were busiest: in lieu of investment activity, refinancing dominated lenders’ time. However, 52 percent of overall H1 lending was accounted for by borrowers refinancing with their existing debt provider. It seems sponsors were generally not able to secure better terms than with their incumbent lenders. An industry talking point is how much activity is merely lenders rolling over existing loans. For Bayes, deals in which there were meaningful changes to lending terms in line with market rates were considered refinancing.

3. The default rate is up and will rise higher: The default rate on the UK’s outstanding loan pile went from 3 percent to 3.9 percent, with all types of lenders reporting defaults and covenant breaches. Bank default rates were typically within 2-5 percent. But debt funds were up to 11.2 percent. Nicole Lux, senior research fellow at Bayes, pointed out many loans are hedged to 2025, meaning interest coverage ratio covenants will not be breached until then. Lenders and borrowers are taking a collaborative approach to stressed situations, she added.

A stark example of CMBS

Commercial mortgage-backed securities issuance is a rare occurrence in Europe these days. In August, US manager Blackstone arranged, as an agency transaction, the first CMBS in the region since May 2022, with the €289 million Last Mile Logistics CMBS 2023-1 UK DAC, against 37 UK logistics properties.

Blackstone is back as sponsor in another deal in the market. According to a pre-sale document by rating agency S&P, the £250 million (€289 million) Stark Financing 2023-1 DAC is backed by a senior loan from Bank of America and Deutsche Bank to Blackstone as part of its acquisition of Industrials REIT, which owns 103 UK sheds. The deal is expected to close this month and would be a clear example of how the CMBS market remains a financing option in cases.

A deeper look at value

The European Central Bank is turning its attention to property valuers to better understand how they compile their assessments of buildings’ worth, amid concerns that banks have been too slow to mark down the value of their real estate loan books, according to Bloomberg. The news service cited people familiar with the matter who said the concern stems from the current deal drought, which has made it difficult to compare values against transactional evidence. Bloomberg said an ECB spokesperson declined to comment. In August, an EU-wide stress test by the European Banking Authority and the ECB found lenders would remain sufficiently capitalised in an ‘adverse scenario’.

On the road

LaSalle Investment Management has begun fundraising for what could be its largest Europe-focused real estate debt fund. According to a market source, the US-headquartered manager will aim for LaSalle Real Estate Debt Strategies V to exceed the amount of capital raised for its predecessor fund, LREDS IV. That lending vehicle collected €1.1 billion of capital in 2021, which made it the largest European debt fund at the time.

The manager is understood to be targeting a first close in the next six to eight months. A final close is anticipated towards the end of 2025. The latest fund is expected to follow a similar strategy to LREDS IV, which provided debt capital for senior, whole loan, mezzanine, development and preferred equity loans across Europe, the source said. LaSalle declined to comment.

Against the tide

This year, several managers have announced intentions to raise debt funds. That said, fund closes have been few and far between due to challenges faced by investors. As well as LaSalle, alternative investment firm Castlelake is also in the market with the ambition of raising a European debt fund – with a €500 million target. The fund would be Castlelake’s first dedicated European property credit vehicle.

However, the Minneapolis-headquartered firm has a track record of financing real estate in Europe through its partnership with Dublin and London-based non-bank lender Earlsfort Capital Partners. Last December, the two firms announced they had built a UK and Ireland loan book valued at more than €300 million. Castlelake also held a final close on its flagship diversified credit vehicle in November last year, raising approximately $782 million.

An aggregation of woe

The junior lenders to the owner of the mixed-use Fürst development on Berlin’s Kurfüstendamm shopping street will find out on Friday if their application to push it into insolvency has been successful in the Luxembourg courts. Construction has ceased after the ultimate owner, German property company Aggregate Holdings, struggled with high construction costs and debt repayments.

The junior creditors, which include Switzerland’s Bank J Safra Sarasin, have been sidelined in the terms of a debt restructuring plan proposed by senior creditors of the project, according to Bloomberg. Senior lenders, including London-based investment firm Fidera Group, plan to invest capital, including new monies, to finish construction, according to a Fidera spokesperson quoted by Bloomberg. Aggregate secured €1 billion in financing agreements to acquire Fürst in 2021. At the time, the project’s gross development value was €1.6 billion but it is now worth half of this, according to documents seen by Bloomberg.

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