They said it
“It’s an over-simplification to say that this market correction is just another classic credit crunch”
David Hodes, founder and co-managing partner of global advisory firm Hodes Weill & Associates, said in the firm’s 2023 market commentary that many contributing factors make the current market turmoil different to the global financial crisis
As we examined in the cover story of our winter 2022 edition, borrowers face the challenge of refinancing loans amid uncertain market conditions. In a significant example, US mega-manager Blackstone is aiming to extend the maturity of debt secured by a Finnish real estate portfolio.
In 2018, US banks Citi and Morgan Stanley securitised debt that supported Blackstone’s purchase of the Sponda property platform in Finland – the €540.87 million FROSN-2018 DAC commercial mortgage-backed securities issuance. According to a notice last week, the borrower has informed CMBS servicer Mount Street that due to “ongoing macroeconomic instability and market disruption” it had requested a one-year extension to the senior loan.
Under a proposed business plan, it intends to undertake disposals and/or refinancing. As part of the proposal, the senior margin will increase, an extension fee will be paid, and an interest rate cap will be entered. Noteholders are due to consider the request on 14 February – a day before the senior loan matures. Amid such challenging financing conditions, more borrowers can be expected to request extensions.
Social working it out
In one example of a successful refinancing, social housing provider Gentoo Group has refinanced £364 million (€410 million) of debt as part of a £460 million new financing package. Several lenders provided the financing for the not-for-profit group, which included £350 million in bank facilities from UK banks NatWest and HSBC, and Dutch lender ABN AMRO, plus £110 million through a private placement.
John Tattersall – senior director at financial adviser Centrus, which advised Gentoo – said the refinancing process had taken some months, having begun in a “stable interest rate environment” and subsequently had to navigate the challenges of increasing debt costs during 2022.
In a note issued last October, Fitch Ratings outlined a positive outlook for the social housing provider, citing continued high demand for social and affordable housing, as well as revenue increases in the year due to a rise in the cost of social rent.
Rewards for the industrious
Prologis, a San Francisco-headquartered logistics developer and investor, has raised €1.2 billion from the issuance of unsecured debt securities, demonstrating that bond markets remain a source of capital for larger borrowers. Prologis raised €600 million from notes bearing interest at a rate of 3.875 percent, maturing in 2030, and €650 million from notes priced at 4.250 percent, which mature in 2034.
During the last three months of 2022, the company raised $500 million of a total $1.1 billion of borrowings from bond issuances – the remainder being unsecured term loans. Prologis’ debt as a percentage of total market capitalisation is around 20.1 percent, with a weighted average interest rate of 2.5 percent. In a Q4 2022 earnings call, the company’s chief financial officer Tim Arndt said that Prologis had “excellent” credit metrics.
EDR REIM’s UK expansion
Geneva-based manager Edmond de Rothschild REIM has expanded its lending activities into the UK, with a £35 million (€39 million) whole loan to refinance and redevelop a London logistics asset. The firm is the latest lender to enter the UK this year following moves by Canadian manager QuadReal Property Group, which partnered with London-based Precede Capital Partners, and Bahamas-based manager Sterling Global Financial.
The deal comes as EDR REIM announced an update on the capital raised for its real estate lending platform, which features a pan-European high-yield pooled fund and a German separate account. In total, it raised around €350 million by December – €170 million for the high-yield fund and €180 million for its separate account – exceeding its joint target of €300 million.
Temporary pain relief
Amid a significant dislocation in the real estate debt markets, borrowers have been resorting to various workarounds to get deals done. However, as affiliate title PERE explored in its February cover story (registration required), these temporary solutions can only go so far. For example, one workaround for more deep-pocketed managers has been to finance transactions entirely with equity. With opportunities to acquire high-quality real estate at attractive pricing, “we are comfortable over-equitising – closing all-cash today and likely financing when the debt markets find a new equilibrium”, Lauren Hochfelder, co-chief executive at Morgan Stanley Real Estate Investing, told PERE.
Similarly, Dutch pension manager APG decided recently to fund a development project all-equity after receiving unfavourable terms for a construction loan. But as European real estate head Robert-Jan Foortse pointed out: “It’s probably difficult to do everything all-equity. Our pockets may be deep, but they’re not endless.”
Cushman & Wakefield’s latest DNA of Real Estate research [find it here] reveals that prime rents increased in Europe in Q4, while yields continued to increase. The consultancy said a drive towards best-in-class property has driven rental growth. For example, prime office rental growth at the European level was up 6.2 percent compared with Q4 2021.
However, it noted rising rates, inflation and concerns over economic growth had impacted investment, with yields edging out during Q4, at an average rise of 41 basis points for logistics and 31bps for offices. Capital values fell, it added, with a 5.4 percent quarter-on-quarter fall for logistics and 5 percent for offices – the biggest quarterly drops since 2009. While more downward pressure is expected in the short-term, Cushman anticipates a recovery in values in 2024.
Hilltop Credit Partners, the UK-based lending platform backed by manager Round Hill Capital, this week announced the hiring of a new chief investment officer, joining from Japanese bank Nomura. The specialist lender has hired Claudiu Gheorghita [his LinkedIn here] as it aims to continue building its UK loan book and targets expansion into continental European markets to capitalise on what the firm called “unprecedented opportunities within private real estate credit”.
Gheorghita previously worked at Nomura’s real estate and securitised products division, where he was responsible for value-add and opportunistic principal finance, covering all asset classes. In a statement, he said: “Due to the current market conditions caused by the shift in interest rates and geopolitical factors, we see an immediate need for flexible capital that can facilitate the start of new developments or that can help stabilise and complete existing ones.”
Industrial real estate experienced the sharpest decline in value of all UK property sectors during the second half of 2022, according to data provider MSCI. The total appraised value of property in the sector fell 26 percent to £45 billion (€51 billion) during the period. The outlook for the industrial sector is explored in depth by our affiliate title PERE, in its 2023 Logistic Report, which was published last week.
Loan in focus
New Jersey jigsaw
We bring you a rare foray Stateside for this week’s featured loan, following affiliate title Real Estate Capital USA’s coverage of a transaction that highlights the challenges facing borrowers across markets. Difficulty sourcing cost-effective debt has permeated US and European capital stacks, culminating in more creative structures form multiple lenders.
This was exemplified with a $317 million financing package for a new transit-orientated, mixed-use development in New Jersey issued on behalf of developer Triangle Equities. The December 2022 deal featured 22 different tranches of debt from 17 entities including PNC Bank, Goldman Sachs and Basis Investment Group, as REC USA first reported (registration required).
Josh Weingarten, director of capital markets at Triangle Equities, said putting the deal together was more like a jigsaw puzzle than any other transaction he had worked on prior to the higher interest rate environment that began in March 2022. “We constantly ran at the wall and ran into roadblocks and then we would pivot and try something new and come up with a creative solution, and then run at the wall again. That was how we attacked this,” he said.