German banks feel the strain
H1 updates were published by German banks in the past week in which the impact of the real estate downturn was made apparent. Last week, Munich-based BayernLB reported a €12 million pre-tax loss in its real estate business area, compared to an €82 million profit in the same period in 2022. The main reason, it explained, was the “current situation on the real estate market” and the need to make adequate provisions for risks – net risk provisions increased by €127 million. It did point out that the business area’s operating profit was up €24 million due to higher net interest income on the back of higher rates. However, net commission income was down due to fewer transactions.

This week, another Bavarian bank, MünchenerHyp, said pressures in real estate markets affected its business performance. Its net interest income was up 11 percent, but it also increased its loan loss provisions amid a tougher backdrop, to €50.1 million at the end of H1. The sharp rise in rates and construction costs, the bank said, “significantly dampened” demand for property financing, with new business down 62 percent in H1 to €1.3 billion.

For sale in Spain
Three non-performing loan portfolios, mainly backed by residential assets, are being prepared for sale in the coming weeks. Spanish lender BBVA is reported to be looking to offload a package of loans with a gross book value of €400 million, known as Artemisia, according to trade publication React News [paywall]. Another NPL portfolio, known as Backgammon, owned by Valencia-based CaixaBank, will also be marketed imminently – with a GBV of €485 million. React also reported that fellow Spanish bank Santander has Sir Barton, a portfolio of residential and SME loans, for sale. This NPL portfolio has a GBV of €400 million. KPMG is advising CaixaBank and Santander, while Alantra is advising BBVA.

Despite these proposed sales, ratings agency Scope Ratings said in a note on 8 August that stage two loans – which indicates a loan that has gained in credit risk since origination – across the banking sector were only marginally higher than pre-covid levels and that Spanish banks “compared favourably on this metric” with most banks in Europe.

More warning bells for China Evergrande
The story of the world’s most indebted property developer is nearing an important juncture. At the end of last week, Shenzhen-headquartered China Evergrande, which has been buckling under more than $300 billion of debt since 2021, filed for Chapter 15 bankruptcy protection in the US. The firm declared the filing a “normal procedure” as it works out a restructuring plan for almost $32 billion of international obligations.

Nonetheless, the update also prompted further warning bells that China’s biggest housing business was struggling to handle its loans. In a statement responding to media reports, China Evergrande chairman Hui Ka Yan asserted that “the company is pushing forward its offshore debt restructuring as planned.” That has done little to assuage markets, with onlookers believing the firm’s woes are compounding China’s flailing economy, which some analysts now expect to miss the year’s 5 percent GDP growth target. Nomura is one bank downgrading its GDP growth forecast to 4.6 percent.

Two credit entries
European real estate debt continues to attract managers aiming to capitalise on the opportunity presented by the expected property refinancing shortfall in the next few years. Illinois-based Hilco Global has launched a UK property lending business – Hilco Real Estate Finance – with the aim of providing bridge financing facilities. It is expected to begin marketing for a junior finance fund from next month. Hilco previously sold its US-based lending business in 2014 to New York-based private equity firm Garrison Investment Group. Read more here.

Separately, Atlas Capital, a firm launched by the former head of portfolio finance at investment firm Bain Capital Credit, Sean Tarrant, is preparing to launch its maiden stretch-senior fund targeting up to €150 million equity. Tarrant understands the fundraising market is difficult because of the denominator effect but is optimistic about raising capital from family offices and high-net-worth investors.

CFO Stridhs out
As SBB, the troubled Swedish residential and social property company, battles to refinance its debts, the departure of its chief financial officer has been announced. In a press release issued on 18 August, the company said Eva-Lotta Stridh, who also served as deputy chief executive officer, had “decided to leave her position” but that she would continue in her role for another three months.

Stridh’s exit, suggested Bloomberg, is part of a management shakeup under the leadership of the company’s new CEO. Leiv Synnes took the helm at SBB in June, replacing Ilija Batljan, SBB’s founder. Synnes, formerly CFO of Sweden’s Akelius Residential Property, is said to be seeking to assemble a team capable of navigating the company as it seeks to reduce its debts and sell assets.

Finance to Finnish Helsinki scheme
Velo Capital, a manager that has set out its stall to provide green financing in Northern Europe, has provided its first loan through its Velo Mezzanine Credit Fund, for which it held a first close on €136 million in June. The loan will part-finance the final phase of developer Ylva’s Lyyra complex in Helsinki, which includes offices leased to tech giant IBM. The finance will be used to complete a building containing 57 apartments and a hotel. Velo is targeting 10 percent-plus net IRRs through its strategy, through which it targets ‘brown-to-green’ projects. Velo is the real estate credit arm of Urban Partners – a platform that also includes real estate manager NREP. Read more about it here.

Trending

Europe’s shrinking €1bn fund market
In Europe’s real estate equity space, large funds are becoming less prevalent. This time last year, there were 20 €1 billion-plus closed-end real estate funds in market focused solely on Europe, targeting €26 billion in aggregate, per PERE data. As of this week, however, there are only five such vehicles in market, with a total target size of €15 billion.

The latest fund to join this small cohort is Harrison Street’s fourth fund in its European opportunistic series. The Chicago-based manager is looking to raise €1.5 billion for Harrison Street European Property Partners IV, as per an SEC filing issued last week. This puts it below only New York mega-manager Blackstone and UK-based Aviva Investors in terms of Europe-only funds launched so far this year, with these managers seeking €9.5 billion and €1.8 billion for their respective vehicles.

Fundraising has dried up globally in a volatile macro environment, but Harrison Street is pushing ahead with its European expansion plans – this latest fund is its largest yet in the region. Check out PERE’s interview with chairman and CEO Christopher Merrill here.

Data snapshot

More ESG, more finance
Access to capital, including debt finance, was identified as the primary benefit of making environmental, social and governance-related investments in real estate – ranking even higher than increased asset values, according to a survey of 158 real estate participants from Germany, the UK, France, Spain, and the Netherlands by Drooms, a data room provider.

Loan in focus

Wells backs Irish PBSA
In the US, Wells Fargo has a track record of financing student housing provider Global Student Accommodation. This week, it completed its first lending deal with GSA in Europe. The US bank provided a refinancing of two purpose-built student accommodation assets in Dublin – the Yugo Highfield Park scheme and Yugo Dominick Place, which were completed in 2020 and 2019, respectively. The two assets are owned by GSA in a joint venture with US-headquartered manager Harrison Street.

GSA said that, in the past 10 years or so, it has developed or acquired more than 3,500 beds in Ireland, making it the country’s largest provider of student housing. In a report published at the start of this year, consultant Cushman & Wakefield reported that student numbers in Ireland increased 2.1 percent in the 2021-22 academic year, although supply of accommodation tapered, with just one scheme under construction as at Q3 2022.

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