Term Sheet: Germany’s biggest landlord reports €3bn write-down, Patrizia’s €300m debt ambition, Precede co-founder steps down

Vonovia reports €2.7 billion in asset value declines despite rental business growth; Patrizia sets sights on a €300 million fundraise for its second credit investment vehicle; Precede's Daljit Sandhu steps down as chief operating officer; Scope Ratings warns of further pressure ahead for property companies; and more in today's briefing, exclusively for our valued subscribers.

They said it

“When I look back at the first half of 2023, I see it clearly as a period of strong evolution and progress, with organisations everywhere accelerating their investment in the new way of working that is set to transform millions of working lives this year and beyond.”

Mark Dixon, chief executive officer of Swiss-headquartered flexible workspace provider IWG, tells shareholders a hybrid work boom is reaping rewards, as it reported record revenues on Tuesday.

What’s happening?

Losses for Germany’s biggest landlord
Germany’s largest real estate group Vonovia reported a €2 billion loss for the second quarter of the year on Friday despite 10 percent growth in its core rental residential business and a vacancy of only 2.2 percent. Vonovia said the “trend in asset value declines” in the wider market prompted a €2.7 billion writedown in the value of its assets, following a €3.7 billion writedown in the previous quarter. Overall, the value of its tangible assets – a metric that describes a company’s assets minus its liabilities – now stands at €40.4 billion, 5.4 percent below figures for March. Despite this, Vonovia said its refinancing obligations were covered “well into 2024”. In July, the company partially repurchased 17 bonds maturing from 2024 onwards with a nominal value of €1 billion, at a discount of 11 percent. It has also been undertaking asset sales. Philip Grosse, chief financial officer, said the confidence of the capital market in its business model remained “high”. During the same period in 2022, the company – which owns residential units in Germany, Sweden and Austria – made a €1.8 billion profit.

Precede co-founder steps down
Daljit Sandhu, the chief operating officer of UK-based development lender Precede Capital Partners, has stepped down from the company she co-founded in 2021. In a statement on Tuesday the company said Sandhu had left the business to “explore other opportunities” and that her successor would be in place by early 2024. Sandhu co-founded the business alongside Randeesh Sandhu and Karen Dunstan with the backing of investment management firm TowerBrook Capital Partners. The business has undertaken £1.7 billion (€1.9 billion) of loans to date. Sandhu said: “The time has come for me to explore wider private market opportunities, such as my longstanding interests in private equity, venture and tech.”

Investing responsibly 
Following the full deployment of an initial $50 million property credit mandate, manager Patrizia believes now to be a good time to ramp up its debt platform. The firm sees how European asset values are increasingly being priced to accommodate higher debt costs, Marko Multas, fund manager of Patrizia’s Global Real Estate Debt Fund, told Real Estate Capital Europe. “If you look at last year, it was not responsible to invest in the market where you see the base rates moving 300 to 400 basis points, and then at the same time valuations holding up.”

Multas added that the Augsburg-based company decided to delay its strategy of collecting between €200 million to €300 million of new mandates – from existing investors – due to seeing few deals in 2022. Patrizia is seeking to provide loans targeting the mid-market borrower, ranging between €10 million-€20 million and secured against real estate in Europe and Asia. It has two strategies: one focused on loans offering 60-75 percent loan-to-value, with estimated 8-10 percent net returns; and the other, a  higher risk 70-80 percent LTV funding product, which is seeking 15 percent-plus returns.


Pain will persist 
Even as interest rates approach the peak of the tightening cycle in Europe and the US, European commercial real estate companies can expect little near-term relief from the higher borrowing costs and rising capitalisation rates that are impairing credit quality, writes Philipp Wass, managing director, corporate ratings, at rating agency Scope. With base lending rates equal to, or in line with, prevailing yields of real estate companies, which averaged around 4-6 percent at the end of 2022, the outlook is “downbeat”, Wass writes, most notably for companies in the Nordics and Germany. Like-for-like rental growth will not compensate for the pressure higher financing costs was having on assets values, despite inflation helping some sectors.

“The market values of investment properties remain under constant pressure – most significantly for offices – as does commercial real estate companies’ and homebuilders’ interest cover,” he says, adding that median interest cover fell to 3x at the end of the first quarter for the real estate firms under the company’s coverage – from 4.1x at the end of 2022. Further declines in interest cover are likely, he says.

A market of no consequence
In a blog posted on Friday, global asset management firm AllianceBernstein issued a defence of the Swedish commercial real estate sector, arguing the situation was “less threatening than feared” to the wider European market, despite the well-publicised refinancing issues faced by its largest property companies. The blog’s author Vivek Bommi, head of European fixed income and director – European and global credit, writes: “The bonds of leading Swedish real estate companies have faced successive credit rating downgrades, sparking fears that commercial real estate troubles will extend to banks and property companies across Europe. We disagree. In our analysis, Sweden’s banks and property companies are mostly well placed to ride out the property-market downturn, and we see fears of a domino effect as overly pessimistic.”

Investors should take care not to extrapolate Sweden’s property woes across Europe, Bommi reasons, because Sweden’s financial system is “far more sensitive to commercial real estate than the European average”. He says financial institutions are more exposed to property relative to other markets in the region, and explains Sweden’s property market is one of Europe’s smaller markets, accounting for about 2.8 percent of the total.

Loan in focus

FAH halves its debt costs
An unnamed European bank has shouldered a €56 million refinancing of debt held by Funding Affordable Homes, a fund managed by Geneva-based real estate management firm Edmond de Rothschild REIM. The loan replaced nine facilities provided by three banks and more than halved its cost of debt, the company said. The interest rate on the 20-year loan is based on an inflation-linked gilt rate, aligned with FAH’s inflation-linked rents. FAH’s UK portfolio comprises 768 existing homes across 10 schemes, valued at £135 million (€156 million). The predecessor facilities were provided by three banks, including UK banks Barclays and Secure Trust Bank.

Data snapshot

Deutschland in the doldrums
Activity in the German investment market remained “extraordinarily low” in July, according to constancy firm Savills, where 60 sales totalled €1.8 billion – a slight fall from this year’s monthly average of €2.2 billion. Two major portfolio transactions helped the logistics sector to register €1 billion of investment, while only two other deals were over €100 million.


Atelier appoints Robertson for Scotland push 
Development lender Atelier has appointed Edinburgh-based Bruce Robertson as lending manager to “play a central role in growing the scale and variety of Atelier’s lending in Scotland”, the company said. Robertson, who has held senior roles at Bank of Scotland and within Lloyds Banking Group, will help the business expand its issuance to borrowers that are developing residential, student housing and healthcare assets. Robertson said the country’s small-to-medium-sized developers were providing “resilient and inventive” in delivering homes in Britain.

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