They said it
“The debt funds that have stepped into that highly leveraged space have got to be in a worse position [than banks]”
Marc Bladon, head of real estate at UK and South Africa-headquartered bank Investec identifies potential cracks in the business models of alternative debt providers in commercial real estate, in the Financial Times this week.
Two deals reported in the past week indicate appetite among German banks for logistics. In the first, Bavarian developer and investor VIB Vermögen, a subsidiary of property company DIC Asset, sourced a €505 million syndicated, seven-year loan to refinamnce 45 German sheds. German banks Helaba and BayernLB were co-arrangers, with Berlin Hyp also participating, according to law firm Baker McKenzie, which advised Helaba.
In the second transaction, German lender pbb Deutsche Pfandbriefbank provided a €117 million loan to refinance eight logistics developments in the Czech Republic and Poland, in a loan to a fund managed by asset manager GLP Capital Partners.
Speaking to Real Estate Capital Europe at MIPIM last month, Christof Winkelmann, board member at Wiesbaden-based Aareal Bank, provided insight into how German bankers are thinking about logistics. He cited undersupply and the sector’s relatively short, inflation-indexed leases, as factors that will partially offset rising yields.
Europe’s real estate lenders are increasingly vocal about efforts to supply sustainable finance. This week, manager LaSalle Investment Management told Real Estate Capital Europe it is targeting at least €500 million of green lending this year. The firm has worked with third-party advisers to devise a green lending framework, aligned to the Loan Market Association’s green loan principles, which it uses as the basis for loan structures tailored to each sponsor’s business plan.
Through its green lending drive, LaSalle is aiming to write loans to support building owners’ sustainability-focused retrofitting projects, as well as ground-up developments of new, sustainable properties. As part of its loan structures, LaSalle includes covenants to ensure borrowers provide enhanced reporting on the green aspects of business plans. Read more about its approach here.
BNP Paribas goes again
At a time when traditional lenders are pulling back from lending, and recent bank failures compound the uncertainty felt by borrowers in the European real estate market, Paris-based BNP Paribas Asset Management has seized the opportunity to bridge the gap by bringing to market its third real estate debt fund. The firm is now fundraising for its Luxembourg-domiciled BNP Paribas European Enhanced Real Estate Debt Fund. The Parisian manager aims to raise up to €300 million to target senior loans – between 60-70 percent loan-to-value – across Europe.
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Low yield, high risk
The German multifamily investment market has already been a casualty of interest rate rises in recent months. This is partly owing to these investments’ low initial yields, which make it difficult for buyers that use high levels of debt, as rising borrowing costs have led to negative leverage. The units traded in 2022 equated to less than a quarter of those sold during 2021, according to Savills. But such metrics, says credit rating agency Moody’s, make for a new kind of vulnerability.
The low yields for multifamily – which are as low as 2.1 percent in Berlin – coupled with higher debt costs mean owners are “particularly sensitive” to default risk, both during the term of a loan and at the point when sponsors need to refinance, says the credit ratings firm. But another part of Moody’s thesis is that tight rental controls are limiting landlords’ ability to offset rising operating and debt servicing costs thereby exacerbating the negative impact of rising interest rates on multifamily property values. For more, read our coverage.
The downside of staying liquid
The European Central Bank explores the financial stability risks of real estate investment funds in Europe in a paper released on 3 April. In it, the ECB argues that vehicles offering frequent redemptions but which own illiquid property assets pose a risk to the stability of the commercial real estate market.
The ECB says the value of assets held by REIFs accounts for 40 percent of commercial real estate ownership in the region, and this exposure is a “key vulnerability” in the event of a deterioration in property market conditions as investor redemptions increase. The paper reasons that when cash buffers are low, as is typically the case for vehicles located in France, the Netherlands and Ireland, fire sales are more likely, adding further downward pressure on property prices. To address this, the ECB calls for: “The consistent application of leverage limits, policies that directly reduce the underlying liquidity mismatch, such as lower redemption frequencies and longer investor notifications…”
As banks become more selective about what they will lend against, it is widely recognised that debt funds will play an important role in refinancing maturing loans. However, debt fund managers active in the US and Europe told affiliate title PERE that refinancing transactions can be challenging in today’s market. Reasons cited included sponsors seeking fresh capital despite having incomplete business plans, and higher debt costs meaning borrowers may not have excess cashflow to put towards loan amortisation.
One debt fund manager, Boots Dunlap, chief executive of US-focused RRA Capital, pointed to the country’s multifamily market in which assets originally financed at low interest rates need to be refinanced in a higher rates environment and at higher cap rates. “My personal opinion is most refinance opportunities are pretty ugly,” he said. Read the full article here.
The road is long
Broker Savills has found that even cities with a relatively high proportion of green real estate stock have a way to go in fighting climate crisis. Savills World Research director Paul Tostevin said that, while New York and Berlin scored best in terms of the volume of sustainable property assets, these scores are low “in the context of the urgency of fighting climate change”.
Loan in focus
A consortium comprising Austrian Erste Group Bank and Romanian Raiffeisen Bank has provided a five-year €200 million package to developer NEPI Rockcastle to refinance two Polish shopping centres.
NEPI, which operates €6.6 billion of shopping centres in Central and Eastern Europe, also sourced €143 million from shareholders as a ‘scrip dividend’.
The loan proceeds will be used to repay the revolving credit facilities used for the acquisitions of Forum Gdansk and Copernicus Shopping Centre, which were completed in December 2022.
In October last year, Real Estate Capital Europe reported strong lending fundamentals in CEE, citing higher growth, lower unemployment, and lower consumer indebtedness, as well as market yield spreads of 200 to 400 basis points and capital values below Western Europe.
Today’s Term Sheet was prepared by Daniel Cunningham, with Lucy Scott, Evelyn Lee and Mark Mwaungulu contributing