Term Sheet: Fears build over US banking crisis and real estate recession, equity investors spy credit opportunity at PERE Europe Forum, major declines in European investment volumes

US bank lending conditions tighten further prompting concern across financial markets; Sweden's SBB fails to convince ratings agency with its deleveraging drive; the UK debt opportunity seduces yet another equity investor; lending looms large at the PERE Europe Forum; and more in today's briefing, exclusively for our valued subscribers. 

They said it

“We may be between Bear Stearns and Lehman Brothers, and for some of those who were active in 2008, you remember probably what happened.”

Speaking at the PERE Europe Forum 2023 (read more below), Nathalie Palladitcheff president and chief executive officer of Canadian manager Ivanhoé Cambridge, reminds delegates the US banking crisis could yet create more havoc

What’s happening?

US lender nerves revealed
The first Federal Reserve Senior Loan Officer Survey since a slew of US regional bank collapses has been published, revealing banks continued to tighten lending standards across markets during the first quarter. Banks were increasingly selective about borrowers and how much they lend to them. When asked specifically about commercial real estate lending, this negative trend was more pronounced. Stricter standards for construction and land development were reported by 73.8 percent of the lenders surveyed – comprised of 80 banks and 24 branches of foreign lenders. In addition, 66.7 percent had the same view regarding so-called ‘non-farm, non-residential’ properties – which includes offices, hotels and industrial.

In a note, Dutch lender ING Bank described this “aggressive” tightening as a “huge story”, explaining that higher borrowing costs and reduced credit availability was “typically toxic for economic growth”. The tightening of credit markets in the US will no doubt continue to be watched closely by those in Europe’s real estate financing market.

Scepticism rules SBB
Despite its commitment to deleveraging, Swedish landlord Samhallsbyggnadsbolaget was dealt a blow by an S&P Global ratings downgrade of the company on Monday. The BB+ rating with a negative outlook, the credit ratings company reasoned, was due to not having seen a sufficient enough improvement in the company’s credit metrics: “We take into account the company’s commitment to deleverage…However, we believe that SBB will not be able to reduce debt to debt plus equity to well below 60 percent. In addition, higher refinancing costs will likely weigh negatively on the company’s EBITDA interest coverage.”

Ilija Batljan, SBB’s chief executive and founder, told shareholders that S&P’s action meant the interest repayments on SBB’s debt would increase. It has also forced the company to postpone dividend payments, as well as to cancel a planned rights issue designed to strengthen the company’s liquidity.

Ashby drives into debt
Another week, another equity-focused manager shifts its focus to real estate debt. The latest newcomer is property entrepreneur Peter Ferrari’s Ashby Capital, a London-based real estate business, which manages a £1.8 billion (€2 billion) equity portfolio. Sources told Real Estate Capital Europe the company has created a debt platform with £100 million of seed funding to invest in development finance and mezzanine in the UK. The new platform will be led by former HSBC and RBS banker Charles-Etienne Lawrence and will provide loans ranging between £10 million and £50 million, for terms of between one and five years.

PERE Europe Forum

Debt takes centre stage
Debt was a preoccupation of speakers at the PERE Europe Forum hosted by affiliate title PERE in London this week and attended by almost 300 delegates.

Sophie van Oosterom, global head of real estate at investment manager Schroders Capital, reported on banks’ shrinking appetite for commercial real estate, adding that some sectors were more exposed than others, with lenders finding it hard to see “which are the haves and have nots”. She said: “Retraction is happening in the market at this moment in time, where banks are stepping back, no longer willing to engage as much.”

This leaves firms reflecting on the opportunity the European real estate debt market presents. Jessica Hardman, head of European portfolio management, real estate at Frankfurt-headquartered asset manager DWS, said: “We are working collaboratively with our investors who are nervous about the market and have other allocations. So, obviously debt is interesting and we’re having a lot of inflow and inquiries about that.”

Meanwhile, James Boadle, managing director, Europe at manager Oxford Properties, which does not currently have an active European-focused lending platform, told delegates: “We believe in credit.”

Credit is, in fact, where Jay Kwan, head of Europe at Candian manager QuadReal, would put his last dollar, he said during the opening panel at London’s Glaziers Hall: “It’s a pretty compelling argument as to why you should go private credit versus everything else you’re looking at on the equity side.”


Recession: a shoe-in
What happens in the US property market inevitably has an impact across the Atlantic. European real estate debt professionals are keeping an eye on conditions in the world’s biggest property market. A US real estate recession is an inevitability once property owners in the market start revaluing their assets in the shadow of rising interest rates and waning office demand, US executives have been telling the Financial Times.

While owners delay the daunting task of undertaking revaluations, Scott Kleinman, co-president of US manager Apollo Global Management, describes this process as the “next shoe to drop” in the US, adding: “Like everything else, it has been priced so tightly and there hasn’t been a commercial real estate crisis in the US since the ‘90s.”

A recession will not be universally felt, argues Anne Walsh, chief investment officer at manager Guggenheim Partners. Walsh believes that a real estate recession would be unleashed in specific parts of the market, such as large urban centres San Francisco and New York, as well as second-class offices requiring repair. An unnamed banker, however, hinted at the potential for contagion to other aspects of the economy, warning: “Commercial real estate is leverage on leverage on leverage… if people are forced to quickly unwind that leverage it can pop up in other places.”

Listing strikes twice
German listed giant Vonovia has sold another part of its portfolio to a private buyer. After giving up a minority stake in a 21,000-unit residential portfolio for €1 billion to manager Apollo Global Management in late April, the residential-focused real estate investment trust has generated another €560 million from a sale of five assets to New York-based private manager CBRE Investment Management. CBRE IM used “several investor solutions sponsored by the firm” to make the purchase, according to an announcement. For Vonovia, it marks more than €1.5 billion in sales this year, against a target of €2 billion. Both transactions in a matter of weeks give hope to a market that is waiting for some lights to go on in the dealmaking department. “After a very difficult first quarter 2023 with little movement, the market is cautiously opening. Buyers and sellers can come to an agreement again,” Rolf Buch, chief executive of Vonovia, said in a statement. “This in itself is a cause for optimism.”

Data snapshot

Capital stays shy
Investment into European real estate continued its downward trajectory during the first quarter of 2023, according to data provider MSCI. The $35 billion invested during the three month period represented a 59 percent decline compared with the same period last year.

Loan in focus

LaSalle back at Wembley
US-headquartered manager LaSalle Investment Management is well acquainted with Wembley, the north London suburb best known as the home of England’s national stadium. In May 2022, it borrowed £187 million (€215 million) from UK lender Cheyne Capital Management for the acquisition and construction of a mixed-use scheme there. LaSalle has again been active in the area, which is subject to regeneration efforts.

This time, LaSalle is the lender, providing a £130 million green loan to US firm Greystar for the acquisition and development of a student housing scheme. The fixed-rate loan will part-fund a 20-storey, 770-bed scheme due to complete in summer 2025.

The deal is LaSalle’s 14th loan in the student housing sector. The facility’s green structure also fits into the lender’s target of providing at least €500 million of sustainable loans this year.

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