Term Sheet: First Property’s senior lending move, a warning on Irish debt, Starz refinances Brookfield

UK real estate company First Property Group becomes the latest to enter the lending space with a senior loans platform; Ireland’s central bank warns of elevated risk to real estate loans; Brookfield sources a significant German refinancing from Starz Real Estate; and more in today's briefing, exclusively for our valued subscribers.

They said it

“We think that we and others are marking down [real estate] investments given the environment this quarter and in the coming quarters”

Goldman Sachs chief executive officer David Solomon tells CNBC the New York-headquartered bank will post impairments on loans and equity investments tied to commercial real estate in Q2 and is unlikely to be the only bank that will.

What’s happening?

Another debt entry
The wave of investment managers hanging their hats in the real estate debt space continues to grow. Last week, London-based commercial property fund manager First Property Group became the latest to make a move into lending. The AIM-listed company announced it has set up a real estate debt platform to provide senior loans. First Property will provide loans of up to £20 million (€23 million), with a loan-to-value ratio of up to 65 percent. It said the higher leverage and interest-only aspect of loans makes the platform “close to unique” in the current debt market. Capital will come from the company’s own resources and third-party investors. “Our move into senior secured commercial property lending via this platform is in response to a clear gap in the market created by higher interest rates and a retreat of traditional lenders, including banks,” said Ben Habib, chief executive at First Property.

Refinancing – it’s everyone’s problem
It has been said the refinancing gap is a crisis facing borrowers rather than lenders. But this is questionable in light of warnings issued by Ireland’s Central Bank that loans in the Irish market are at “elevated risk” of default owing to the likelihood of continuing price declines. The bank’s comments came as part of its latest Financial Stability Review, published on 7 June, in which it said that while the average estimated weighted loan-to-value ratio of bank property loans is around 50 percent, these positions looked vulnerable as borrowers try to sell assets in a stressed market. Investment across the Irish property market dropped by 18 percent year-on-year during Q1 2023, with €626.4 million invested across 32 deals, according to property adviser Colliers. But distress in the non-bank sector, the bank said, could be more intense given the funding models “appear[ed] to be more sensitive to financial conditions than that of banks”. For more on this read here.

Landlords sweat it out
At a time when lenders are more focused than ever on the strength of borrowers’ income, a court case in the UK is noteworthy. According to CoStar News, a group of property owners including the Crown Estate, M&G Real Estate and Landsec, are planning to challenge an estate restructuring plan by gym chain Fitness First, because it involves rent cuts being sought at sites that remain open for business following the restructuring. The group of landlords is said to be concerned that, if the process is approved without challenge, it would open the door for other struggling companies to shift the burden of operating difficulties to landlords and away from shareholders or secured creditors, CoStar reported. The UK’s High Court has postponed a decision on the restructuring plan to 26 June, giving the landlords more time to consider their positions.

People move

Knight Frank hires for strategic capital role
Property consultancy Knight Frank has hired Josephine Jones – former managing director of real estate finance for HSBC in Asia-Pacific – to lead a newly created ‘strategic capital’ team within its London-based capital advisory business. Jones [her LinkedIn here] will work alongside debt advisory leader Lisa Attenborough and equity advisory leader Emma Winning and provide strategic advice to institutional clients on large or complex transactions. Such deals will include those with operational income, concentrated tenant profiles, or require multiple or hybrid financing sources. Her remit will cover sustainability-linked deals, multi-jurisdictional portfolios, and corporate and infrastructure cross-over transactions. Jones relocated to Europe in March 2022 following 10 years in Hong Kong. At HSBC, she was responsible for generating new business, building relationships and increasing HSBC’s institutional finance portfolio. Jones spoke to Real Estate Capital Europe in May for an analysis of hiring trends. Click here to read more.


Not out of the woods
Last week, José Pellicer, head of investment strategy at manager M&G Real Estate, told Real Estate Capital Europe it is difficult to know whether we are in “the calm after, or before, the storm”. Pellicer was discussing the impact of regional bank failures in the US earlier this year, following a global real estate report issued by M&G [read our coverage here]. While recent banking sector turmoil currently looks unlikely to turn into a full-scale financial crisis, stresses in the system still threaten commercial property markets, M&G said. Pellicer said an escalation in US banking sector problems cannot be ruled out, with the potential to dent lender sentiment in Europe and further impact credit conditions.

Patchy outlook
According to Fitch Ratings, asset performance outlooks for collateral in European commercial mortgage-backed securities transactions that the agency rates are more mixed than at the start of the year. Fitch has changed its outlook for industrial properties to ‘neutral’, while keeping retail and office properties as ‘deteriorating’. For the latter two sectors, the agency said the correction in capital values will continue under the combined weight of monetary policy tightening, and ongoing shifts in demand. However, for industrial property, Fitch said values appear to be stabilising, on the bank of strong rental growth. Demand from onshoring and near shoring manufacturing is helping support occupier demand, it added. Read more here.

Mixed picture for offices
According to consultant Colliers’ latest global offices report [access it here], European office vacancy, which stood at 8.1 percent at the end of Q1, has only crept up marginally since the end of 2021, due to new development activity declining. It added occupancy rates have largely returned to pre-pandemic levels of 65 percent on average across Europe. However, Colliers presented a varied picture on vacancy rates, with City of London vacancy up to 11.4 percent from 9.7 percent and tech-oriented Dublin up from 10.6 percent to 13 percent. Meanwhile, vacancy in Brussels dropped from 8.3 percent to 7.7 percent, and London’s West End held steady at 6.8 percent.

Data snapshot

Aviva sees rewards in property debt
London-headquartered Aviva Investors, the investment arm of the insurance firm, sees compelling returns for real estate debt in the next five years, according to its latest research. Returns projections for UK and European floating rate real estate debt were highest among selected real assets markets.

Loan in focus

Starz refinances Brookfield in Stuttgart
London-based alternative lender Starz Real Estate has provided a £93.5 million (€109 million) senior loan to Canadian manager Brookfield for the refinancing of the SI-Centrum mixed-use entertainment complex in Stuttgart. The complex includes theatres, a four-star hotel, casino and 320 apartments, among other uses. Brookfield acquired the asset in 2018. The transaction was the second between Starz and Brookfield, following the €31.1 million refinancing of a 732-bed student accommodation scheme in Porto, in January 2022. Limor Shilo, head of origination at Starz, said SI-Centrum is a strong leisure asset that has rebounded from covid-19 “strongly”.

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