Term Sheet: ECB’s credit warning, lenders taking keys on UK properties, BGO exceeds fundraising target

The European Central Bank’s latest warning on commercial real estate points to tighter lending conditions ahead; two lenders reported to have taken control of UK assets from borrowers in a sign of things to come; BGO defies a tough capital raising environment to exceed the equity target for its latest fund; and more in today's briefing, exclusively for our valued subscribers.

They said it

“Rising delinquencies and defaults in the sector could restrict lending and trigger a vicious cycle of tighter funding conditions, falling commercial property prices, and losses for financial intermediaries”

In a blog post last week, the International Monetary Fund voiced concerns about the US commercial real estate sector, adding that the risks are relevant for Europe, where it said many of the same factors are at play. Read more here.

What’s happening?

Euro Sign in Frankfurt

European squeeze

It is only January and already it is difficult to commit to an optimistic view that times are changing for the real estate market. Last week, experts said borrowers should not expect a sharp fall in debt costs owing to a lack of clarity over where inflation might head.

Now, the European Central Bank has warned that lending conditions will become tighter for commercial real estate across the year. Although the central bank indicated that credit standards for most sectors would loosen in the next six months, it predicted they would remain “very elevated” for commercial real estate as refinancing and repayment risk in the sector grows. The survey also reported a “strong decline” in loan demand from real estate companies because higher financing costs, lower asset values and structural changes had dampened demand.

Taking the keys

Since interest rates began to spike in 2022, lenders and borrowers have largely worked together to solve situations of stress in property loans. However, there is mounting evidence of lenders taking ownership of assets. Last week, React News reported that KKR had handed control of the Highgate Studios workplace development to its lender. The US private equity firm bought the scheme in 2021 alongside developer Hondo Enterprises. Manager LaSalle Investment Management was reported to have provided an acquisition and capex loan in February 2022.

This week, React News separately reported that another US private equity firm, Lone Star, is taking ownership of a portfolio of Hilton hotels in the UK from its borrower, property firm Ability Group. In June 2021, Lone Star provided a £100 million-plus (€117 million-plus) loan through its Lone Star Real Estate Fund VI opportunistic vehicle to refinance the portfolio. The two stories demonstrate how alternative lenders are prepared to seize control of assets in distressed situations.

Location is everything, still

London-based LRC’s default on a loan backed by the River Ouest office building in the western suburbs of Paris provides further evidence that workplaces must possess not one but many superpowers to survive. The campus-style office completed in 2009 with a ‘Very Good’ BREEAM certification, a must for occupiers today. However, that has not been enough to compensate for its less than central location, factors at the root of its declining appeal and increasing vacancy. This means the €196.2 million securitised loan, Europe’s first green CMBS transaction, has been transferred to special servicing.

However, loan servicer Mount Street said in a filing that instead of the borrower having exercised the second of two loan extensions, the view all round was that a “consensual” restructuring was achievable. Selling the asset will depend on a convincing story that the views of the Seine, which the office possesses, are just as good as a city centre spot in today’s competitive market.

Call for a pause

In Germany, listed office and logistics property company Branicks Group is in negotiations with creditors to defer payment of €425 million of near-term debt maturities. The company, formerly known as DIC Asset, has asked lenders of a €200 million bridging facility to suspend payments, and it has also asked noteholders of €225 million in bonds due this year to extend the maturity.

In a statement, Branicks, which has been selling assets to cover short-term debt obligations, explained its predicament: “Given the longer-than-expected stagnation in the transaction market, the management board is being forced to take action to stabilise the group’s financial position with respect to the short- and medium-term maturities of its existing financing.” Read more here.

Above target

Stress is becoming evident across Europe’s real estate loans market. However, for some, fresh lending is considered a huge opportunity. Manager BGO is among them. Amid a tough fundraising environment, the US firm this week announced it has surpassed its fundraising target with a €1.38 billion final close of its third Europe Secured Lending Fund. “This fund has been raised in a challenging environment, so the fact that we exceeded our target speaks to our reputation as one of the largest and most trusted alternative lending teams in Europe,” said Jim Blakemore, managing partner, global and European head of debt at BGO. Keep an eye out for further coverage on Real Estate Capital Europe.

Bond bonanza

A second real estate company in two weeks has returned to the European bond markets after a relative hiatus. This week, Logicor, the logistics platform owned by sovereign wealth fund China Investment Corporation, issued a €650 million unsecured bond for a term of 4.5 years and a coupon of 4.625 percent. The proceeds will be used, in part, to refinance the company’s borrowings in a year in which it has €792 million of unsecured debt coming due.

Shane Kelly, chief financial officer at Logicor, said the issue marked Logicor’s return to the capital markets after a two-year break. Last week, after concentrating on secured borrowing for a year, German residential landlord Vonovia issued its debut sterling-denominated bond, totalling £400 million. Philip Grosse, CFO of Vonovia, said high demand was proof the time was right to return to the bond market.


Candlestick chart and data of financial market.

Public display of performance

Past performance is no guarantee of future results, as they say. But this disclaimer does not apply in all cases, according to data provider MSIC Research. On 19 January, its executive director, Bryan Reid, wrote in a blog post that positive news for listed real estate stocks might be a good omen for private markets. After posting negative total returns for most of 2022 and 2023, the MSCI UK IMI Liquid Real Estate Index ended 2023 with year-on-year total returns of 7.5 percent – and its US index echoed a similar result.

“Over the last 20 years, the performance of the liquid indexes has generally serviced as a leading indicator for direct real estate markets,” Reid explained. “If you believe that public market pricing will lead private, you may [harbour] some optimism for private markets in 2024”.

Data snapshot

Due date

According to data from JLL, living sectors account for the largest share of global loan maturities to the end of 2025, followed by offices. The property consultant estimated $2.1 trillion of loans are due in the timeframe. It added maturities will catalyse transactional activity and, in some cases, distress. Read more here.

Loan in focus

Scape Hammersmith student accommodation

Student loan

UK banks NatWest and Virgin Money have provided a £105 million development financing package to student housing developer Scape for its 181 Talgarth Road scheme in Hammersmith, London. The three-year loan, which was split 50/50 between the lenders, will support the development of 713 beds for the Scape Hammersmith project, which is being delivered via a forward funding deal. Scape is aiming to complete the scheme in June 2025, ready for the start of the 2025/26 academic year. NatWest arranged the financing and brought Virgin Money into the deal due to its experience in the sector. Purpose-built student accommodation remains a popular asset class among property investors, as well as lenders.

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