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

The latest Bayes Business School report shows lending was down and focused on refinancing in H1; Blackstone returns to the European CMBS market with a logistics deal; LaSalle’s fundraising ambitions demonstrate that managers see opportunity ahead in property lending; and more in today's briefing, exclusively for our valued subscribers.

They said it

“Commercial real estate, in light of higher interest rates for longer, also all the developments we have seen from covid onwards, is an asset class that will go through difficult times for a couple of years”

Christian Sewing, chief executive officer of Deutsche Bank, tells Bloomberg the asset class will face further turbulence as higher rates topple expectations

What’s happening?

Panoramic sunset view over the London skyline

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.

People moves

Emma Huepfl, Commercial Property Forum

Huepfl takes Bank of England role

Emma Huepfl, former co-head of manager CBRE Investment Management’s EMEA credit platform, has been appointed chair of the Commercial Property Forum – an industry-led group convened by the Bank of England. The forum helps monitor the commercial property sector in the UK. She will serve a three-year term and replaces PineBridge Investments’ Marc Mogull.

The forum, set up in 1993, meets quarterly, and includes lenders, investors, developers, valuers, and advisers, among others. Huepfl said she will apply her industry experience “and draw upon a broad network of market participants to support the work of the Bank of England during a time of change and challenge for the commercial property market and its stakeholders”.


Jeremy Oppenheim speaking at the Urban Land Institute's C Change Summit

Get it together

“Despite the noise, real estate is way off track for [reaching] net zero,” said the keynote speaker at the Urban Land Institute’s C Change Summit in Copenhagen on 11 October. But Jeremy Oppenheim, founder, and senior partner of Systemiq, which advises companies on how to decarbonise in line with the Paris Agreement, had a solution for achieving “the biggest system-wide transformation in human history”.

His idea majored on companies prioritising co-operation over competition to find solutions to lower the industry’s greenhouse gas emissions at scale – a view echoed by the ULI’s European chief executive Lisette van Doorn. Oppenheim explained: “Multiple brands are coming together to create agreements to ensure suppliers are shifting to renewable energy. The idea you can get those companies, in such an intensely competitive industry, to underpin guarantees together is transformational. Two years ago, that idea was impossible.”

A joint forum of commercial lenders and valuers, alongside the UK’s Royal Institution of Chartered Surveyors, is working on a framework of consistent reporting instructions around ESG in an example of collaboration. Onstage, van Doorn urged greater action centred on a smaller number of initiatives, arguing overlapping initiatives will hamper progress. Read the full story here.

Data snapshot

Growing up fast

An aggregate €44 billion of bonds issued by European real estate companies is coming to maturity in 2025 – an increase on 2024’s maturities of more than one-third, according to data from Scope Ratings and Bloomberg. The volume due to be repaid in 2026 will be even higher, at €45 billion. Most issuers will be forced to deleverage via assets sales, said Scope.

Loan in focus

Top view of conveyor belts transporting boxes ready to be shipped in a large distribution warehouse full of merchandise

Banks join Tritax’s club

UK logistics specialist Tritax Big Box REIT has sourced a £500 million (€576 million) sustainability-linked revolving credit facility from a club of lenders, to refinance a previous facility. The original £450 million facility was due to mature in December 2024. The latest deal has been done with the providers of the previous facility – Bank of China, Barclays, BNP Paribas, JPMorgan, Santander, and Royal Bank of Scotland.

The REIT also attracted three additional banks to the deal – ABN AMRO, China Construction Bank and SMBC. The facility will support the firm’s future investment and development activities. It will feature key performance indicator stipulations on new builds and EPC ranking goals. If key performance indicators are met, Tritax can reduce its margin. The firm added it believes it will cost £2.5 million to achieve a minimum EPC rating of B across its 76-asset portfolio.

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