They said it
“We are pushing banks to focus very much on their concentration of exposures towards sectors which are particularly dependent on energy and fragile to energy shocks”
Andrea Enria, chair of the supervisory board of the European Central Bank, as quoted by Reuters, is urging lenders in the eurozone to review their capital projections under severe adverse scenarios. He cited commercial and residential real estate financing as one area that warranted attention.
Inflation and rising interest rates in key markets are impacting the global performance of real estate. Figures published by MSCI last week [see here] showed global real estate returns decelerated to 2.9 percent, quarter-on-quarter in local currency terms, during Q2 2022 – comprising capital growth of 2 percent and income return of 0.9 percent. At the end of Q1, the data provider’s global quarterly property index showed a total return of 4.4 percent, of which 3.5 percent was capital growth and 0.9 percent was income return. The total return had peaked at 5 percent at the end of 2021.
Speaking in July about the Q1 figures, MSCI executive director and head of real estate solutions research, Will Robson, said slowing three-month returns at the global aggregate level and across many individual markets could indicate the “recent run of stellar global real estate performance is starting to fizzle out”. The latest figures certainly highlight the increasingly difficult job real estate managers face in hitting their return targets amid current economic conditions, and with debt costs rising.
Big week for rates
Across the European real estate lending industry, all eyes will be on news coming out of central banks this week. Riksbank, Sweden’s central bank, already raised interest rates by 1 percent to 1.75 percent on Tuesday and several other central bank monetary policy announcements are due in the coming days. Riksbank’s hike was its biggest interest rate rise in three decades. Today, the US Fed is also expected to announce another sharp rise of 0.75 percent, according to economists’ predictions. The Bank of England, the Swiss National Bank and Norway’s Norges Bank are also expected to increase their respective rates by between 50 and 75 basis points in the battle to bring inflation under control.
Higher rates will put further upward pressure on the cost of real estate debt. Data from consultant CBRE showed debt costs were up across European markets in Q2.
Crossing the bridge
UK lender NatWest Group’s provision of a £200 million (€229 million) senior funding line to Glenhawk, a London-based specialist bridging lender, is evidence of a growing appetite among banks for exposure to the UK property bridging loans market. The capital from NatWest Markets, the investment banking arm of NatWest, will sit alongside an existing funding line from US lender JPMorgan – which Glenhawk secured in 2020. Glenhawk chief executive Guy Harrington said the professionalisation of the bridging lending sector, and increased interest from institutional lenders, has helped the sector lose its reputation for “underhand” loan terms. “There are now more lenders offering bridging financing and they are being backed by sophisticated operators, including investment banks and other global institutions. This fosters a better environment – everyone has to perform to a higher standard and that attracts more capital to the market,” he said.
Barclays, the UK bank, said this week it wants to boost sustainable residential development through the launch of a new lending framework. The sustainable residential development framework, designed in collaboration with CBRE Environmental Consulting Group, will support the financing, monitoring, data collection and delivery of green residential loans, according to Barclays. The framework sets out minimum standards, signposts what more can be done to make an asset green and recognises developers’ positive impact through a ‘social impact score’. The bank said eligible schemes that go further than the minimum criteria can achieve a rating of ‘good’, ‘innovative’ or ’emerald’, awarded at practical completion of the development.
“We are launching this framework to help promote developments with the very best green and social impact credentials, so we can help support the industry in building enough sustainable and energy efficient housing to meet rapidly growing consumer demand,” said Jason Constable, head of real estate for Barclays Corporate Banking.
Making its MARK
Just two short years ago, London-based real estate investment manager MARK, then known as Meyer Bergman, was in the midst of shifting away from the retail strategy for which it was best known. A key part of this shift was the launch of a pan-European urban logistics platform called Crossbay, with a seed portfolio of €500 million of assets under management and a goal to grow the platform to €2 billion in two to three years. The strategic move has been vindicated.
Last week, Crossbay sold a portfolio spanning 128 warehouse buildings and six development sites in Italy, Netherlands, Spain, France, Germany, Belgium and Poland to Prologis for €1.585 billion. The sale is understood to be the biggest warehouse portfolio transaction to close in Europe this year and has delivered more than 30 percent returns for Crossbay’s early investors, including Nuveen, Credit Suisse, Townsend Group and Qatari investment bank Qinvest.
Fixed income market volatility has had a notable impact on borrowing costs and, like elsewhere in Europe, there is growing evidence of an ongoing price correction in the UK real estate market, according to DWS. In its Q3 UK Real Estate Strategic Outlook, published last week, the German asset manager said the most evident repricing has been in logistics and the City of London office market. However, DWS expects outward yield movement in almost all sectors in the coming months. “Yields are now expected to peak much earlier in the cycle than we had previously predicted,” it wrote.
DWS added the living sector should prove more resilient than many sectors in the face of rising inflation and weaker economic growth. The firm continues to favour affordable housing in London and other major regional cities, with student housing in the largest cities also expected to perform well in the coming years. Logistics continues to be well-placed, although the market is not immune from a slowing economy. The office sector is “arguably more vulnerable”, but as price corrections are realised, DWS expects opportunities to emerge in the value-add space.
The longest standing look at US commercial mortgage performance has been published by MetLife Investment Management this week, casting new light on the effectiveness of current risk assessments and the key role of loan-to-value metrics in today’s market.
In tandem with Moody’s Analytics, the New York-based insurer-backed investment manager’s Commercial Mortgage Lending report, released on 20 September, represents a rare large-scale study of the space on par with the Snyderman Study published by Fidelity Investments portfolio manager Mark Snyderman in 1991 about defaults and the estimated effect on yields. The most notable change among lender behaviours in the latest update is the resurging importance of debt service coverage ratios as a risk assessment tool alongside debt yields. Read more, on affiliate title Real Estate Capital USA, here.
DRC Savills’ Asia play
The debt business of real estate fund manager Savills Investment Management has made a key hire as part of plans to target business in the Asia-Pacific region. Savills DRC Investment Management has hired Steve Willingham, the former global head of real estate finance at banking group HSBC [his LinkedIn here], to spearhead its activities in the region. The firm said Hong Kong-based Willingham will work with local investment teams to assist them with origination, transaction management and asset management. It added that DRC Savills’ first debt initiative in the region will focus on Australia.
The hiring is significant for DRC Savills Investment Management. The business, which was fully purchased by Savills last year, was launched as DRC Capital in 2012 and one of the pioneering non-bank lenders in Europe. Its expansion plans, as part of a large organisation, show the scope some in the market see for debt strategies. Willingham will officially join in November, reporting to London-based managing partner Dale Lattanzio. Speaking about the appointment, Savills Investment Management’s chief executive, Alex Jeffrey, said Asia is a market in which the firm expects to experience “significant growth” over the coming years.
PGIM positions for growth
According to Andrew Macland, head of European debt at PGIM Real Estate, a reduction in bank lending presents a significant opportunity for alternative lenders to provide financing. As part of the manager’s plan for growth, it has hired two senior origination professionals for its European debt business. In Frankfurt, it has hired Juergen Helm [LinkedIn here] from HSBC Germany as lead originator responsible for helping to grow the platform by developing new business and loan originations across key European markets.
In London, it has hired Laura Denenga [LinkedIn here] as an originator responsible for sourcing and closing senior and whole loans, as well as mezzanine and preferred equity funding. Denenga was hired from manager Allianz Real Estate. “Demand for real estate debt is steadily growing and these two key origination appointments will help us meet that demand as we further position ourselves for future growth,” said Macland.
Cushman adds Gingell from PGIM
Meanwhile, Cushman & Wakefield has made a senior hire from PGIM Real Estate. The consultant announced David Gingell [LinkedIn here] has joined its EMEA equity, debt and structured finance team as an international partner. At Cushman, Gingell will be responsible for leading financing activity in the UK and Ireland as well as focusing on significant European mandates. At PGIM, where he spent 10 years, Gingell’s most recent role was head of European senior debt, based in Frankfurt. Maud Visschedijk, head of Cushman’s equity, debt and structured finance EMEA unit, said: “Adding pan European-capability with a strong focus on the UK and Ireland is key for us as we continue our growth across the region.”
Performance contagion extends to funds
Lowering returns from direct investments are translating into poorer performance from private funds, according to INREV’s Pan-European Quarterly Asset Level Index.
Loan in focus
Barings’ social housing loan
Manager Barings has originated its first real estate loan in the European affordable housing sector with a £62.9 million (€71.9 million) facility for Domus Social Housing, a UK social infrastructure platform. The 15-year loan will finance the acquisition of 54 properties in London, the Midlands and the northwest of England that are let to UK housing providers managing homes for residents with a range of needs, including those experiencing homelessness and domestic abuse. Sam Mellor, managing director and head of Europe and Asia-Pacific real estate debt at Barings, said: “Increasing our exposure in affordable housing is the right thing to do from both a social impact and a financial investment perspective… With a housing crisis in the UK, as across much of the world, the social case is crystal clear.”