Term Sheet: Blackstone’s default, pbb’s investment play, Aareal’s plans for growth

Blackstone’s Finnish default hints at the refinancing challenge facing even the largest sponsors; Germany’s pbb Deutsche Pfandbriefbank looks to the equity market for diversification; shareholders give Heimstaden a leg-up to deal with its debt pile; and more in today’s briefing, exclusively for our valued subscribers.

They said it

“Given the current challenging market environment, the demand for debt solutions will increase and it will be more important than ever to work with experienced lenders who are capable of navigating the volatility”

Jim Blakemore, managing partner and global head of debt at BentallGreenOak, explains the forces that drove a £1.43 billion fundraise for its third UK Secured Lending Fund – one of the largest raises for a real estate debt strategy

What’s happening?

Blackstone’s default
Events last week demonstrated how even the biggest names in the real estate industry are susceptible to the challenges posed by loan maturities in the current market. On 2 March, loan servicer Mount Street transferred into special servicing a defaulted loan, which is securitised in the FROSN-2018 DAC commercial mortgage-backed securities issuance, and financed properties from Blackstone’s Sponda platform in Finland. It followed two weeks of talks between Blackstone and Mount Street after CMBS noteholders denied the borrower a one-year loan extension. The full story can be read here.

While the details of the two-week talks are confidential, Mount Street said in its announcement that “further proposals” from both sides had been explored. A Blackstone spokesperson expressed disappointment that Mount Street had not agreed to its proposal. A conclusion is yet to be reached.

More borrowers are expected to face difficulty repaying loans at maturity. In most cases, borrowers and lenders will negotiate outcomes directly. In this case, the fact the loan is in a CMBS put its fate into the hands of bondholders, and now a loan servicer. The situation shows not all refinancing issues will be straightforward to resolve.

Highcross in receivership
Savills has taken charge of the Highcross Shopping Centre in Leicester, UK, after German lender Helaba appointed the real estate adviser as a joint fixed charge receiver.

Helaba issued a £165.2 million, five-year, non-recourse loan in partnership with NatWest in 2019 to Hammerson, a London-listed real estate company. In 2021, NatWest subsequently sold its portion of the loan to investment firms Attestor, Octane Capital Partners and Ellandi. Savills will oversee the management of the complex alongside Ellandi.

Helaba is seeking to recoup value from the asset through rental negotiations rather than an immediate sale, according to sources close to the situation.

One potential revenue stream could be the revival of the centre’s former Debenhams department store, which has been vacant since the company went into administration in 2020. Leicester City Council has approved a plan to replace the former shop with homes.

pbb’s investment play…
German bank lender pbb Deutsche Pfandbriefbank this week announced its plans to diversify its business model through an expansion into the real estate investment market. The bank has established a new business area – Real Estate Investment Management – and has launched a fund, alongside Frankfurt-based manager Universal Investment, to invest in German office and mixed-use real estate. Universal will be responsible for setting up and administering the open-end fund.

The bank said its expansion into investment management allows it to tap into additional sources of income. However, it said its strategic focus remains on its core real estate finance segment. “The new business area aims to increase growth potential and earning power whilst keeping strictly to its cost targets,” it added [read more here].

…as Aareal plans for growth
Another German lender is also on the growth trail. Aareal revealed in its preliminary results for 2022 that its real estate loan book had grown from €30 billion to €30.9 billion over 2022. The bank is aiming to further increase its book by the end of this year to between €32 billion and €33 billion. This implies new business of around €9 billion to €10 billion.

Amid profits of €239 million in 2022 – a 54 percent increase of the €155 million reported in 2021 – were some items worthy of note: a loss of €134 million relating to a loan against an office complex in Moscow – the repayments of which have been intercepted by the Russian government.

Also interesting is that Aareal’s yield-on-debt increased across all asset classes in the year apart from offices. While YOD increased from 5 percent to 9 percent over the period for the hotel sector, for instance, office YOD decreased – from 7.6 percent to 6.9 percent. Look out for an interview soon with Aareal’s chief financial officer Marc Hess, who gave Real Estate Capital Europe his thoughts on these results.

Italian upgrade
A €495 million financing deal, which was announced in Italy last week, demonstrates lenders are willing to underwrite landlords’ property revamp plans on a significant scale. Asset manager ARECneprix, which is part of digital banking group illimity, arranged the financing as a securitisation, with Verona-headquartered Banco BPM and independent asset manager GWM Group underwriting the notes.

The financing was provided to Italian property owner Gruppo Statuto for the purpose of enhancing the value of luxury properties, including Palazzo del Toro, a hotel in Milan, and a five-star hotel due to open in the city’s Via Brera. As well as hinting at the attraction to lenders of property upgrade plans, the transaction suggests high-end hospitality assets in cities such as Milan continue to win debt providers’ backing.


A leg-up from shareholders
In January, Real Estate Capital Europe flagged how Sweden’s property companies would be forced to make changes to the way they finance their activities because bond markets, a significant source of debt capital, had turned away from real estate. This week, the Swedish residential landlord Heimstaden Bostad has addressed some of its unsecured bond debt with a buyback.

The company bought SKr10 billion (€907 million) of outstanding senior unsecured bonds for a total cash consideration of SKr9.3 billion using equity raised from existing liquidity and new and existing shareholders. The buyback partly addresses €2.75 billion of unsecured bond debt issued in October 2021, which funded the purchase of a €9.1 billion residential portfolio.

Marcus Gustavsson, senior credit analyst at Danske Bank, said that the issue is notable as shareholders are still committed to the company in spite of challenging times ahead. “There is more to come for the residential sector, in terms of property value write-downs and ICR deterioration,” he said, adding: “If property values continue declining while bond markets remain challenging, the company will likely need more equity issues.”

Cometh the hour
Certain times in the private real estate market cycle suit certain organisations best. When markets reset, that is traditionally when Lone Star Funds, the mostly opportunistic business of sector magnate John Grayken, makes hay. The Dallas-based manager, which has raised more than $85 billion from institutional investors via 21 funds since its inception in 1995, is poised to make it 22.

Teachers Retirement System of Louisiana is one investor considering a commitment to Lone Star Real Estate Fund VII, according to a filing. No fundraising target was specified. Predecessor fund LSREF VI attracted $4.6 billion by its final close in 2019, which was invested across Europe, Asia, North America and Latin America.

Where will Fund VII be deployed? Lone Star typically levitates towards where dislocation occurs at scale. The firm reduced its Asia presence in 2021, judging there to be a lack of near-term opportunity in the region. With increasing instances of broken capital structures in Western markets, a Europe and North America-bias would be a good bet. “You have an idea of what the regional allocation may be when you form a fund, but you don’t know for sure,” Grayken told PERE last year in a rare interview. “Things can change a lot. Then you tend to do more business where the returns are most appealing.”

Data snapshot

Capital growth upgrade
Based on data gathered from 19 organisations between December and February, industry body the Investment Property Forum has upgraded its forecasts for average capital growth across UK real estate for 2023 and 2024. The IPF’s 2023 forecast stands at -5.5 percent, from -7.1 percent in its previous survey, and its 2024 forecast stands at 2.2 percent, from 1.9 percent previously. However, forecasts for the subsequent two years were downgraded to more modest levels. Access the report here.

Loan in focus

Maslow’s biggest loan yet
London-based development lender Maslow Capital, which last January sold a minority stake to credit manager Arrow Global, has provided its largest financing facility yet. This week, it was announced Maslow has provided a £258 million (€291 million), four-year construction loan to a joint venture between developer SevenCapital and manager MARK.

The loan will fund the delivery of a 462-home prime residential-led scheme at 100 West Cromwell Road in the plush Kensington area of London. The scheme will comprise seven blocks, including a 29-storey tower, with homes ranging from studio flats to houses and 40 percent allocated as affordable homes. Maslow has previously financed SevenCapital on four occasions.

“This transaction further showcases our extensive funding capabilities, and we look forward to funding more projects of this magnitude throughout 2023,” said James Henry, responsible for deal origination at Maslow. Read further coverage here.

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