They said it

“What we are seeing today is that liquidity is there for some asset classes, but not all of them”

Isabelle Scemama, global head of French manager AXA IM Alts, speaking at the PERE Europe Summit 2022 in London last week, describes a bifurcation in the private real estate industry following years of pricing convergence between the best and more average assets. Read more here.

What’s happening

Double digits beckon
Few real estate debt professionals will have been surprised to see the Bank of England’s fifth consecutive rate rise last week, when the base rate increased 0.25 percentage points to 1.25 percent [read more here]. But some may have been startled by the Bank’s revised inflation forecast of slightly above 11 percent by October – up from its previous expectation of 10 percent in Q4 2022.

Inflation was a dominant topic at last week’s Real Estate Capital Europe Borrowers and Lenders Forum in London [read more below]. In a keynote speech at our affiliate title PERE‘s Europe Summit, Sabina Reeves, chief economist and head of insights and intelligence for manager CBRE Investment Management, warned of inflation’s impact on real estate markets. “Very few of us [economists] thought that inflation would be this high or this persistent,” she said, adding: “Inflationary pressures won’t vanish overnight. It will have a huge knock-on effect on underwriting. How far can index-linked inflation be pushed through?”

Desperately seeking stability
The US commercial real estate debt market is looking for something elusive: stability. Last week’s surprise 75-basis point increase in the federal funds rate – 25bps higher than expected – has tamped down transaction activity and the pain is not yet over, said Chris Moore, a managing director at New Jersey advisory Chatham Financial. “Early in the year, there was an expectation that the Fed would be able to bring inflation under control quickly and wouldn’t have to take drastic actions. But the sentiment has changed to a realisation and expectation that the Fed will have to take further significant actions to get inflation under control,” Moore said in an interview last week. Read more courtesy of affiliate title Real Estate Capital USA, here.

Full steam ahead in Poland
While many investors have hit pause on investing in Eastern Europe due to the continued aggression of Russia in Ukraine, Dallas-based Lone Star Funds is not deterred. An affiliate of the manager has purchased three office properties in Poland from local developer Cavatina Holding in a deal reported to be worth almost $150 million. The three class A office buildings – two in Kraków and one in Wrocław – are collectively 90 percent leased, according to a release. For Cavatina, it represents the second major portfolio sale to an institutional investor in the last couple of years. The developer sold three buildings in Kraków’s Equal Business Park to a joint venture managed by Warsaw-based manager Apollo-Rida.

REC Europe Borrowers and Lenders Forum

Tackling the big topics
The impact of inflation and rising rates was the overarching theme across panels at the Real Estate Capital Europe Borrowers and Lenders Forum in London last week [see the agenda]. There was standing room only as credit professionals gathered to discuss the state of Europe’s lending markets amid economic volatility. Here are five key points of discussion.

1. Caution is the watchword: Panellists argued that Europe’s property debt market is still liquid, although lenders are mindful of economic conditions. Natalie Howard, head of real estate debt at manager Schroders, commented: “Certainly, lenders are being a little bit more cautious, and the main thing is the concern of the impact the volatility has on values of real estate, and so I think people are pulling back on loan-to-values.”
2. Skilled sponsors are favoured: Now, more than ever, lenders are placing value on sponsors’ track records. Experience is as crucial as considerations such as cashflow and interest coverage, panellists said, particularly in development or repositioning projects. Strong sponsors seeking to enhance office assets’ ESG credentials, revamp struggling retail assets, or build hotels, will find capital, some argued.
3. Borrowers are also discerning: The increasing cost of debt will not necessarily force borrowers to be less choosy about their sources of credit, said Sally Hurst, director, debt strategy and origination at manager M&G Real Estate. “It is not only about the rates you are being offered. It is important for us to know who our lenders are… what sectors they like. We don’t want any surprises.”
4. There are nuanced opportunities in retail: Some lenders are looking afresh at the retail market. “You can’t say one asset class isn’t working any more and that is true for retail… the outlet centre story is definitely attractive,” said Ben Barbanel, head of debt finance at OakNorth Bank. Panellists said they were interested in providing capital for revamping a tenant mix, repurposing shopping centres into residential, or converting parts of retail assets into offices. “Local authorities will come under pressure to allow wholesale repositioning of high streets,” added Barbanel.
5. ESG remains front of mind: The role of lenders in promoting the environmental, social and governance agenda in the property industry cropped up frequently during the event. Schroders’ Howard said it is in lenders’ interests to be focused on ESG: “As a lender, you don’t want to be on the side [of the industry] where there is the potential of stranded assets and obsolescence, and where it is never going to be feasible to spend money on a building.”

Trending

PERE talks distress with Proskauer
The private real estate industry has been on the lookout for large-scale distress since the start of the pandemic. It still has yet to materialise, but Jeff Marwil at law firm Proskauer believes the situation may soon change. The US co-head of the firm’s business solutions, governance, restructuring and bankruptcy group anticipates the current macroeconomic environment – punctuated by high inflation and escalating interest rates – will lead to a significant uptick in troubled real estate deals. Marwil, along with fellow partners Steven Lichtenfeld and Vincent Indelicato, recently sat down with PERE editor Evelyn Lee for a video roundtable on distressed real estate at Proskauer’s headquarters in New York’s Times Square.  Watch a clip of the conversation here.

Data snapshot

Bedding down
‘Beds’ sectors ranked as the most appealing UK asset classes for the next five years in a survey by UK and South Africa-headquartered bank Investec of 110 of its private investor and developer clients. Read the full report here.

Loan in focus

Lending in the sun
Investment banking and asset management firm Alantra has issued an €18.5 million refinancing loan for the 226,000 square foot luxury boutique hotel Boho Club Marbella in Malaga, Spain, owned by Quartiers Properties [see the announcement here]. The long-term and bullet financing will allow the Swedish owner to reduce its financing costs and will provide it with the flexibility to continue investing in and developing other assets in the Costa del Sol. Jaime Cano Artero, partner at Alantra, said the sector appealed despite global economic turbulence. “We believe in Spain’s tourist sector, especially where assets have potential to be repositioned and the sponsor is active in that respect,” he said. Read more about lenders’ attitudes to hotels here.

Today’s Term Sheet was prepared by Daniel Cunningham, with contributions from Lucy Scott, Samantha Rowan, and Evelyn Lee.