Term Sheet: Central banks diverge on rates, Bank of England extends its gaze to shadow banks, FAP makes its debt fund ‘dark green’

Central banks diverge paths for the first time in months as inflation and high rates persist; the Bank of England’s system-wide stress test brings scrutiny to alternative lenders; Germany’s FAP makes a sustainable statement by converting its debt fund to Article 9; and more in today's briefing, exclusively for our valued subscribers.

They said it

“The banks aren’t going to have big problems coming from commercial real estate, they will have some problems. The sensationalised headlines about all the crashing down that’s going to take place – it’s overstated”

Bob Sulentic, chief executive officer of property adviser CBRE, downplays the likelihood of a widescale banking crisis driven by distressed property loans as he tells Bloomberg TV that necessary value adjustments have ‘run their course’. Read more about the impact of US bank failures here

What’s happening?

Source: Getty

Rates divergence
The US Federal Reserve opted to keep interest rates unchanged at a meeting last Wednesday, but cautioned it could complete two additional interest rate increases before the end of 2023 as it seeks to reduce inflation to its targeted 2 percent level. “Holding the target range steady at this meeting allows the committee to assess additional information and its implications for monetary policy,” the US central bank said in post-meeting commentary. The target range continues to be 5-5.25 percent.

Despite the clarity, Marcia Kaufman – chief executive of mortgage lender Bayport Funding, based in Great Neck Plaza, New York – expects continued dislocation in the market. “We will continue to see private credit funds take advantage of the void in the credit market by opportunistically stepping into high-quality lending opportunities,” she told affiliate title Real Estate Capital USA on Wednesday.

Meanwhile, the European Central Bank continued its current upwards trajectory, raising its policy rate another quarter point to 3.5 percent. The move brings rates on the continent to a 22-year high. “Barring a material change to our baseline, it is very likely the case that we will continue to increase rates in July,” ECB president Christine Lagarde told a press conference. “Are we done? Have we finished the journey? No. We’re not at our destination. Do we still have ground to cover? Yes, we still have ground to cover.”

Tomorrow, the UK’s Bank of England is also expected to raise rates by 0.25 percent to 4.75 percent as the country continues to grapple with its inflation, although some commentators are predicting a more aggressive 0.5 percent hike.

Stress in the shadows
The UK central bank has launched its first system-wide exploratory stress test, to better understand how financial institutions – including non-banks – behave in stressed market conditions. The Bank of England was prompted to undertake the exercise following its intervention to buy billions of pounds of gilts following last September’s ‘mini budget’. It is asking institutions such as pension funds, hedge funds and asset managers to evaluate the impact of severe but plausible stress to financial markets and consider what actions they would take as a result and how they might culminate in shocks to the financial system.

“If a common response to the scenario is for participants to sell the same asset, the bank explained in a statement, “then fire sale-type dynamics may occur”. The bank’s increasing scrutiny of non-bank institutions is relevant to the UK’s real estate financing sector, which now features a strong alternative lender component.

Finding cash
As sponsors source new finance ahead of loan maturities, some are being forced to put fresh capital into deals to reduce lenders’ exposure. Last week, React News reported that developer Northacre is aiming to sell the office element of a £1 billion (€1.2 billion) London development in order to support the refinancing of the luxury residential element of the scheme. React reported that Northacre is selling 115,000 square feet of offices and 20,000 square feet of retail at The Broadway – the redevelopment of the former Metropolitan Police headquarters. It said the sale, for a targeted £165 million, would help with the refinancing of £700 million of debt. In 2017, First Abu Dhabi Bank provided acquisition and development finance for the scheme.

The dark green option
Berlin-based real estate advisory firm FAP has made a statement of sustainable intent by upgrading its open-end real estate debt fund to an Article 9 – or ‘dark green’ – vehicle, under EU Sustainable Finance Disclosure Regulation. The fund’s objective must now be sustainable investment, or a reduction in carbon emissions.

Hanno Kowalski, managing partner with FAP Invest, the group’s real estate lending arm, said the move was, in-part, for risk mitigation – to ensure the future value of underlying assets. FAP now faces the challenge of living up to the expectations which come with Article 9: “No one wants to be seen greenwashing. We are prepared to meet stricter criteria and continue to develop our fund over time to further boost ESG performance of the assets we are investing in,” Kowalski said. Read more here.

Patrizia partners up to lend
German real estate manager Patrizia has taken a further step into the lending market. Last week, Real Estate Capital Europe reported the Augsburg-based firm had partnered with ARA Europe, the European subsidiary of Singapore’s ARA Asset Management, to provide two property loans in the UK and Spain with a combined value of almost €60 million. In the first, the lenders provided £39.5 million (€46 million) of junior debt for a 130,000 square foot green office refurbishment in Birmingham for UK construction firm Kier Group. In the second, they provided a €12.7 million whole loan to developer AMRO Partners for a student housing scheme in Salamanca, Spain. Read more here.


Enough value has been shed
Despite exceptionally tight supply, record-low vacancy and index-linked leases, even the logistics sector has experienced a price correction in recent months. But following a 15-20 percent value decline since the middle of 2022, asset manager DWS believes the time is right to invest in the sector again and thinks the UK, the Barcelona area and the Netherlands are particularly well positioned for growth. “For several years, ultra-low yields have forced us to take a cautious view…” it reported in a paper, released on 14 June, adding: “We believe the majority of logistics repricing has already been seen and expect yield compression for most markets will return from 2024 onwards.”

Trouble downloading talent
As office occupiers demand workplaces in buzzing neighbourhood districts, it looks as though data centre landlords might end up similarly challenged, according to a report from property adviser Savills, in a paper released on 19 June. The company cited “remote and (sometimes) unappealing locations” as one of the main drivers for talent and labour shortages in the data sector, the others being a mismatch between skills being taught and the skills needed by employers and a relatively old workforce.

“Labour shortage and the lack of inflow of new talent are one of the biggest challenges facing the data centre sector,” Savills said, warning it could limit the future profit margins of landlords. It added: “Data centre landlords will mostly be impacted by higher development costs due to higher labour construction costs.”

Data snapshot

Recovery incoming
Capital growth declines have kept the performance of non-listed European real estate in the red for Q1 2023, according to data from industry body INREV’s Quarterly Fund Index. However, the total return of -0.97 percent for the quarter marks an improvement on the -6.04 percent return generated in Q4 2022, driven by growth in the distributed income return component.

Loan in focus

UK housing: Gatehouse owns single-family houses in regional England (Source: Getty)

Single-family fortunes
The real estate finance division of UK insurance company manager Legal & General Investment Management has provided a £78 million (€91 million) senior refinancing of a UK single-family build-to-rent portfolio, with a 55 percent loan-to-value bullet loan. The facility has been provided to Gatehouse Investment Management, a specialist investor and manager of UK single-family housing. The facility will refinance an existing loan and enable the implementation of environmental performance improvements on the portfolio’s existing stock, plus expansion of the portfolio. The homes are owned through a joint venture between Gatehouse and the sovereign wealth fund Kuwait Investment Authority. It comprises 750 homes across Greater Manchester, Merseyside and the West Midlands.

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