They said it

“An equilibrium may be reached and liquidity can return in H2 of this year, albeit at a discounted valuation”

Justin Curlow, global head of research and strategy, real assets, at manager AXA IM Alts, in its 2023 outlook paper, says a rapid rise in financing costs impacted valuations and yields in Q4, and is likely to persist in H1 2023.

What’s happening?

Extension denied
Last week’s Term Sheet highlighted US manager Blackstone’s request for a one-year extension to a senior loan secured by the Finnish portfolio of its Sponda property platform, which is securitised in the FROSN-2018 DAC commercial mortgage-backed securities transaction. The loan was provided by US lenders Citi and Morgan Stanley in December 2017, with an initial balance of around €591 million.

The borrower had told CMBS servicer Mount Street that it had requested the extension due to ongoing “macroeconomic instability and market disruption”. It had proposed a business plan in which it would undertake disposals and/or refinancing.

However, according to a notice from the issuer, at a meeting of CMBS noteholders held yesterday – ahead of today’s loan maturity – the consent threshold of 75 percent of votes was not reached, meaning the extraordinary resolution that would have permitted the loan extension was not passed. Keep an eye out for further coverage of the situation.

Continental shift
Edinburgh-headquartered manager abrdn joins the growing number of alternative lenders expanding their reach across European markets. This year, the company is aiming to extend its real estate lending activities into continental Europe, through a €1 billion senior lending vehicle, for which it is currently putting capital into place.

The manager, which has an approximately £3 billion (€3.4 billion) property debt portfolio, has spent the last decade or so focusing its lending activities on its home country of the UK. However, according to Martin Barnewell, investment director at abrdn, the company sees opportunity in continental European markets which he says are “slightly behind the UK” in the growth of non-bank lenders. But abrdn clearly sees continued opportunity in the UK as well – the firm is expecting a Q3 second close on its targeted £1 billion abrdn Commercial Real Estate Debt II fund, which it launched in March last year.

JLL spying for debt
Robert Tchenguiz, the high-profile real estate investor, has mandated consultant JLL to find fresh debt for the former London home of spy agency MI5, which is subject to redevelopment plans, React News reported (pay wall). The entrepreneur is looking for fresh financing for Leconfield House, an office building in Mayfair, because a £100 million facility from UK lenders NatWest and Nationwide will expire in June, React said.

Tchenguiz’s Rotch Property Group bought it in 2004 for £140 million. The current building value is £150 million, React News reported, adding it would increase to £225 million post-refurbishment. Leconfield House has consent to be redeveloped into 70,000 square feet of offices and a 6,000-square-foot restaurant, replacing a former plan to convert the building into a hotel and private-members club.

Candriam ups Tristan investment
Candriam Group, a subsidiary of New York Life Insurance Company, has become the majority owner of €15 billion European real estate investment manager Tristan Capital Partners, after purchasing an additional 31 percent stake, bringing its ownership to 80 percent of the firm.

No changes will be made to Tristan’s senior leadership team, with founder and executive chairman Ric Lewis to remain at the helm. In a statement, Lewis said the business is well-positioned for growth ahead of the next European real estate cycle. For Tristan, this includes debt strategies – the firm launched its lending business in 2021, with the appointment of Dan Pottorff from LaSalle hired to manage a credit vehicle fund called TIPS One Income Plus Real Estate Debt Fund. Tristan has since built a loan book of €400 million in Europe.

Loan in focus

Warsaw loan record
Four banks have agreed to refinance a mixed-use complex in central Warsaw, in a deal the borrower described as the largest ever non-portfolio loan in the Polish commercial real estate market. Luxembourg-headquartered developer HB Reavis – which has a long track-record in central and eastern European markets – secured the €475 million financing for Varso Place, which was completed in 2022 and comprises 1.5 million square feet of office, hotel and retail space, including the BREEAM ‘Outstanding’ Varso Tower.

The loan was provided by the Polish arm of Spanish bank Santander, plus Poland’s Bank Pekao and German lenders Helaba and Berlin Hyp – the latter two having previously lent €350 million against the project.

HB Reavis said the transaction is a “good prognosis” for the other schemes it is planning – including in Poland as well as Germany and the UK. In August, it was reported to be seeking a £1 billion loan for its One Waterloo office scheme in London.

Trending

Losing credit
Rising interest rates are driving a deterioration in the credit quality of European real estate companies, according to Moody’s. In a note, the rating agency warned credit quality would continue to deteriorate, with companies that depended on asset sales to secure financial stability being particularly vulnerable.

Further property value declines would increase debt-to-asset ratios, it said, while sharply higher cost of debt would reduce fixed charge cover ratios – which shows how well a company’s earnings can cover its fixed expenses, such as debt payments. “For most of the companies we rate, the latest balance sheets still reflect property valuations as of the first half of 2022 … and did not reflect the change in the property and interest rate environment,” Moody’s said.

Debt hits land values
Property consultant Colliers cited the impact of increased borrowing costs in a report in which it said UK industrial land values almost halved in the second part of last year. The firm said industrial land values shrank by 47.4 percent, to £1.5 million per acre in the six months to December 2022. Yields moved out by more than 150 basis points as the Bank of England raised the UK base rate, it added.

“While it was generally accepted that the market was due a correction, the speed at which this occurred was widely unexpected,” said Andrea Ferranti, head of industrial research at Colliers. “We suggest that values are about to bottom out, and providing we see strong signs of inflationary pressures abating this year, borrowing costs will ease.”

Data snapshot

Back to desks
Office workers in key European markets are increasingly returning to their desks, the latest data from consultant BNP Paribas Real Estate suggests. Annual take-up for 17 markets monitored by the firm came in at almost 9.1 million square metres, equivalent to around 98.7 million square feet, and a 10 percent increase on 2021’s total. The consultancy said take-up was back in line with the long-term average. Read more here.

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