Term Sheet: Concern about 2023 debt conditions, Aareal’s UK hotels deal, NREP’s self-imposed carbon tax

The latest Emerging Trends report by the Urban Land Institute and PwC highlights debt market fears for 2023; Aareal’s hotel loan to a Tristan Capital Partners fund demonstrates lender support for UK hospitality; NREP takes the initiative with a self-imposed carbon tax as it targets net zero; and more in today’s briefing, exclusively for our valued subscribers.

They said it

For the first time in a decade, investors are asking not just about the reward, but about the risk associated with investments

Marc Rowan, chief executive of Apollo Global Management, told investors on the firm’s Q3 earnings call that alternatives “should shine” because they produce excess return relative to risk.

What’s happening?

Emerging gloom
The latest edition of one of European real estate’s key sentiment indicators, Emerging Trends in Real Estate, was released on Thursday, with some grim predictions across many aspects of the market for 2023. Unsurprisingly, one of these was the expectation around the availability of debt capital. According to the report produced by industry body the Urban Land Institute and consultant PwC, 55 percent of those surveyed believed the supply of debt for refinancing or new investments will “decrease somewhat” next year, while 9 percent said it would decrease “significantly”. Quotes from interviews are published anonymously, which means participants are more candid than they would otherwise be. “We think everything’s going to be worth less next year than it is this year,” said one unnamed bank lender. One manager described the debt crisis as the “borrower’s problem”, owing to the fact that lower leverage among lenders means they can force asset sales without losing money.

Aareal checks into UK hotels
Despite challenges in the debt market, large transactions continue to close. Germany’s Aareal Bank has a long track record of lending against European hotels, and is evidently still confident about the market in the UK. This week, it announced a £239.9 million (€275.5 million) senior refinancing of the acquisition of a portfolio of hotels, for which it was sole arranger. The loan was provided to an opportunity fund advised by London-based manager Tristan Capital Partners – European Property Investors Special Opportunities 6. In April, through the fund, Tristan acquired a majority shareholding in Raag Hotels, which owns nine boutique hotels in London, Edinburgh and Glasgow. “Hotels in the UK, particularly in London, have been recovering quickly, with performance already nearing pre-pandemic levels,” said Bettina Graef-Parker, managing director of special property finance at Aareal.

Debt-to-equity metrics
US manager Kennedy Wilson Holdings released its earnings for Q3 2022 last week, after which company analyst Simply Wall Street flagged a list of negatives about its financial position. The New York-listed company, which currently has $5.5 billion of debt against $1.9 billion of equity, has a “high” net debt-to-equity ratio of 259.8 percent, according to Simply Wall Street, which states that Kennedy Wilson’s debt is “not well-covered” by its operating cashflow. The Beverly Hills-headquartered firm has been active in Europe since 2011. In that year, it purchased a UK real estate loan portfolio from Bank of Ireland for $1.8 billion and it has completed $10 billion of investment transactions in the region since. Overall, it has made $9 billion real estate debt investments since 2010, according to its website.


The self-imposed taxman cometh
Copenhagen-headquartered manager NREP is taking the old adage of making your own rules further by making its own penalties too. Last week, the firm, which currently manages assets valued at approximately €18 billion, announced implementation of a self-imposed carbon tax system “to incentivise rapid and deep emission cuts”. After famously declaring a notably near-term carbon neutrality target of 2028 at the turn of this year – affiliate title PERE analysed this extensively in February – the firm has determined this ambitious target would be better achieved by imposing a monetary figure on the cost of carbon to the business. Specifically, the firm stated it would adopt the EU Trading System as its benchmark to ascertain the price of its tax, currently €90 per tonne. That is three times the cost of “quality carbon offsets,” NREP said. Embodied carbon emissions tax will be paid as a one-off at asset completion while operational emissions tax will be paid annually. It is not all stick, though. NREP also said it would introduce a carrot in the form of a “green incentive” to financial motivate its project teams to exceed green market standards.

People moves

New CEO for Arrow in Italy
Arrow Global, the London-based pan-European credit and real estate manager, has appointed Daniele Patruno as chief executive officer of its Milan-headquartered firm Europa Investimenti. Incumbent CEO, Stefano Bennati, will continue in his role as chairman of Arrow Global Italy. Patruno has worked at Europa Investimenti since 2009, most recently as head of credit strategy. He started his career at Barclays Capital in London. In his new role, he will report to Mark Gollin, managing director and global head, platforms. Acquired by Arrow in 2018, Europa Investimenti is part of Arrow’s offering in Italy, Europe’s largest non-performing loan market. The business acquires and securitises NPLs and financially restructures distressed or insolvent companies.

Data snapshot

Less leverage
Data from real estate adviser CBRE shows lenders are providing lower loan-to-value ratios across prime sectors in Europe. Read more here.

Loan in focus

Soho Valdemarín: High-end villas in Madrid (Source: Quantum)

A Spanish loan for Stoneweg
Swiss real estate investment adviser Stoneweg last week provided a €24 million senior development loan to developer Quantum Homes to fund the construction of 19 high-end single-family villas in Madrid. With prices starting at €1.8 million, the villas – part of a scheme called ‘Soho Valdemarín’ in the Moncloa-Aravaca district of the Spanish capital – are at the luxury end of the scale. Following the deal, Stoneweg has provided more than €50 million of financing to projects in 2022, alongside its own development strategy, which includes the recently completed ‘Skyline’ towers – a housing development in Madrid’s Tetuán district.

Today’s Term Sheet was prepared by Daniel Cunningham with Lucy ScottPeter Benson, and Jonathan Brasse contributing