“The debt markets were as open and vibrant at the end of 2021 as I can remember in my career”

Richard Hill, head of US real estate investment trust and commercial real estate debt research at Morgan Stanley, on what he sees as positive fundamentals for commercial real estate markets. Read more courtesy of affiliate title Real Estate Capital USA, here.

What’s happening?

Like BioMed, only bigger
There was huge news in the European real estate equity market yesterday. Blackstone announced the €21 billion recapitalisation of Mileway, its pan-European last-mile logistics platform, in the largest-ever private real estate transaction. Similar to Blackstone’s $14.6 billion recapitalisation of its life sciences portfolio company BioMed Realty Trust, existing investors in Mileway have agreed to recapitalise the company along with the New York-based mega-manager’s core-plus real estate business. The parties intend to hold the business long-term, which will allow Blackstone to continue “to create value for investors seeking core-plus returns”, James Seppala, Blackstone’s head of real estate Europe, said.

As with the BioMed deal, the majority of capital for the recapitalisation is coming from existing investors, which were given the option to retain or increase their stake in the company or exit for cash. Blackstone began amassing the assets for Mileway with equity from its Blackstone Real Estate Partners Europe funds six years ago. Today, Mileway has grown into Europe’s largest last-mile logistics company, with more than 1,700 assets totalling 158 million square feet across 10 countries.

Capital into debt
DRC Savills Investment Management is the latest non-bank lender to bring a large amount of capital to the European real estate lending market. But according to Dale Lattanzio, partner at the firm, the final close of the fourth in its high-yield debt fund series was achieved “in spite of one of the most challenging markets for attracting new investors that has existed for some time”.

DRC SIM raised €600 million for European Real Estate Debt IV, from 16 investors – including six which were new to the fund series. The vehicle, which has a gross IRR range of 10-12 percent, was the first in the series to offer investors the opportunity to commit capital in either sterling or euros. It seems DRC SIM has found a wide range of lending opportunities across Europe – it has already invested more than 50 percent of the capital across seven loans, including mezzanine, senior and whole loans. Read more here.

Financing Saturn
The chronically undersupplied UK housing market remains a huge focus of interest for equity investors and debt providers alike, as seen in a significant lending deal last week. UK high street bank NatWest, alongside Leumi UK, the UK subsidiary of Israel’s largest bank, provided an initial £150 million (€178 million) of debt, comprising a £120 million revolving development facility and a £30 million investment facility to a joint venture which has capacity for 3,000 new build-to-rent homes worth more than £1 billion.

The JV, dubbed Project Saturn, was formed between manager EQT Exeter and developer Sigma Capital Group in September 2020. It has initial plans to deliver three developments, described as affordable rental homes for sustainable living, in Greater London.

Lending sustainably
Aviva Investors, the asset management arm of UK insurer Aviva, is closing in on its target of writing £1 billion of sustainable real estate loans. Last week, it announced a £40 million sustainability-linked financing agreement with listed investment company Urban Logistics REIT, to refinance 13 UK logistics assets. The second loan provided to the company, the facility is aligned with Aviva’s Sustainable Transition Loans framework, which it launched in December 2020, and is structured to include interest rate reductions if the borrower meets environmental-linked targets. The seven-year, interest-only facility begins with a fixed rate of 2.26 percent per year.

Gregor Bamert, head of real estate debt at Aviva Investors said the new deal helps the company “to further extend our sustainable transition loans programme, which forms one of the five interim goals we have set ourselves in order to reach net zero across the entirety of our real assets business by 2040”. By November 2021, the company had deployed more than £740 million through the programme, across eight loans.

Banking on prime
Patterns of consumer demand are yet to stabilise after the uncertainty of the pandemic, but there is evidence lenders are eager to back properties in key locations in Europe’s major cities. Among them is Maximilianhӧfe, owned by real estate company Pembroke – a 215,000-square-foot mixed-use asset on a luxury retail street in Munich, Germany, which contains offices, upmarket retail and restaurants. It is evidently the type of prime, core asset that Germany’s banks are willing to lend against. Last week, pbb Deutsche Pfandbriefbank and LBBW, two lenders that typically look for core financing opportunities, wrote a €300 million loan to refinance the asset [read more here]. “This further highlights our confidence in this fantastic asset, which is fully let to some of the biggest international brands and leading luxury retailers,” commented Nick Moldon, senior vice-president and head of UK and Germany at Pembroke.

Trending

Allocations rising
The only way is up when it comes to institutional investor appetite for senior debt. Nearly half of institutional investor participants surveyed as part of affiliate title PERE’s Investor Perspectives 2022 Study ranked debt in the number one spot – suggesting that the security and lower risk profile of the asset class are crucial right now. The study, which surveyed 111 institutional investors about their objectives for the year, also found 46 percent of participants preferred senior debt over whole loans (24 percent), junior and mezzanine (19 percent), and CMBS products (11 percent). Another key takeaway is that debt will continue to be an attractive option for many institutions, with 55 percent of participants intending to invest more or the same amount of capital in the next 12 months compared with the last year.

Data snapshot

Exponential growth
Land prices in the world’s biggest logistics markets have exploded in recent years, according to a Prologis report.

Loan in focus

Nice in Nice
ICG Real Estate is among those real estate lenders willing to back hotel assets as international travel gradually returns. Last week, it provided a €62 million whole loan to NAOS Hotel Group to support the forward acquisition of a four-star hotel located at Nice Cote d’Azur airport in the South of France, which will be operated under the Sheraton brand when it opens this spring. The loan was written through the ICG Real Estate Debt VI fund, the latest in what the firm calls its ‘partnership capital strategy’ which is targeting €1.7 billion of capital.

“We have strong conviction on the Sheraton Nice Hotel due to the recovery of international travel. In addition to airport custom, demand is supported by its unique location in the Nice metropolitan area and a very dynamic local business sector,” commented Philippe Deloffre, managing director at ICG Real Estate.

Today’s Term Sheet was prepared by Daniel Cunningham, with Evelyn Lee, Samantha Rowan and Kyle Campbell contributing.