They said it
“This part of the crisis is over… Down the road – there are rates going way up, recession, real estate – that’s a whole different issue. For now, we should take a deep breath”
Following JPMorgan Chase’s acquisition of the assets and liabilities of First Republic Bank, chief executive Jamie Dimon tells investors on a conference call on 1 May that while stability has returned to the US banks, further crises may lie in wait
Calm or collapse?
The financial markets did not concur with the JPMorgan chief executive’s view, stated above, that the banking crisis is in a period of calm. Following the company’s $10.6 billion acquisition of San Francisco-headquartered First Republic Bank, two US regional lenders suffered share price declines. Shares in Californian lender PacWest were suspended after its stock dipped by 39 percent, while Arizona’s Western Alliance stock fell by more than a fifth.
But, as Dimon said himself, “no crystal ball is perfect”.
Whatever the future holds, JPMorgan will be well-insulated from any future real estate losses. The FDIC and JPMorgan have a loss-share transaction agreement in place on the commercial, residential and single-family loans purchased from First Republic, which means the two will share any losses or recoveries on the loans. The FDIC is covering this with $13 billion from an insurance fund, according to our affiliate title Real Estate Capital USA (registration required).
Chipping away in Spain
Blackstone has secured another successful refinancing for Spanish assets. This brings the total refinancing it has achieved this year for properties it owns in the country to more than €1 billion. This time, it has nailed a €543 million loan against a Spanish multifamily portfolio to replace a €440 million facility originated in 2018. The debt, which was underwritten by BNP Paribas, Citi and Crédit Agricole CIB, reflects a 40 to 50 percent loan-to-value and carries a margin of 250 basis points over the Euribor benchmark rate, according to trade publication CoStar News. The residential portfolio, based in Madrid, is owned and managed by Fidere Patriminio, which the mega-manager bought in 2013.
Europe tempts Oaktree
In March, Los-Angeles-headquartered Oaktree Capital Management published its latest market insights for the first quarter, in which co-chairman Howard Marks reflected on the tendency of investor psychology to “oscillate wildly between ‘flawless’ and ‘hopeless’”, explaining that the firm likes to sit between the two extremes. Now, Oaktree has capital aplenty with which to explore the nuanced opportunities in Europe’s debt markets, having raised, as affiliate title Private Debt Investor reported, €1.2 billion at final close for its European Capital Solutions Fund III (registration required).
The firm is seeking to use the fund to provide debt financing to performing, non-sponsored, mid-market borrowers in Western Europe, and will invest in real estate, as well as corporates and asset-backed loans.
Views from Frankfurt
Real Estate Capital Europe is at Deutsche GRI 2023 in Frankfurt, where the gathering of senior real estate professionals is into its second day. Here are some of the key discussion points so far:
No-one wants to catch a falling knife: The German investment market is in a holding pattern, with a gap between buyer and seller price expectations. Some expect a handful of deals later this year will break the inertia. One delegate suggested banks urging sponsors to sell might speed up the process.
There is pain ahead: Delegates were divided on whether recession looms. However, several agreed there are difficult times ahead as property owners contend with higher rates forcing a repricing. The good news, one argued, is there are favourable supply/demand dynamics in key sectors.
Lenders want to preserve relationships: Despite uncertainty, lenders indicated they want to support clients, albeit with a keen focus on debt yield, rather than loan-to-value, and on micro-location. However, some delegates questioned how lenders will refinance loans where capital values have fallen markedly. One suggested a difficult three or so years lie ahead as banks work out problem loans.
Mega-trends need consideration: Long-term factors such as demographics, sustainability, the growth of artificial intelligence, and potential deglobalisation, will determine how real estate is used in future, said one speaker. Shorter-term ‘shocks’ such as the pandemic and the war in Ukraine will have less of a lasting impact, the speaker argued.
Euro lenders tighten belts
The European Central Bank’s lending survey for the first quarter of 2023, published on 2 May, reveals there has been a substantial tightening of credit standards for loans or credit lines to businesses, and predicts more of the same over the second quarter. Framing the survey responses – canvassed from 158 banks in the euro area – with perspective, the ECB said the pace of net tightening in credit standards remained at the “highest level since the euro area sovereign debt crisis in 2011”.
Benjamin Bouchet, structured finance analyst at Berlin-based Scope Ratings, explained the implications of the findings on commercial real estate lending to Real Estate Capital Europe: “Clearly, tighter lending criteria is not good, as most loan-to-value ratios are expected to deteriorate, with the increase in rates and debt yields remaining under pressure. However, it isn’t a credit crunch in Europe – not at the moment. The key point to this report is that banks are still lending.”
Paint the capital markets RED
Real estate fundraising may have shrunk to a five-year low last year, but the 50 largest capital raisers in the real estate debt space are faring comparatively better on the fundraising trail. Managers ranked in PERE’s 2023 Real Estate Debt 50 have secured an aggregate $267 billion for real estate credit strategies over the past five years. This represents an increase of 19 percent on last year’s cohort.
The minimum threshold for inclusion in the big league has also risen to almost $2 billion – only the firm in 50th place has raised less. With a restricted supply of credit in today’s market, investors are bullish on the prospects for real estate debt investments to generate an attractive risk-adjusted return.
That said, our analysis of the RED 50 reveals some stark divergence in fortunes, particularly when applying a regional lens – North America and Asia-Pacific are up, but Europe is firmly down. And with eight new names on this year’s list, several large organisations have slid down the ranking. The fifth edition of Real Estate Capital Europe‘s Real Estate Debt 30 is published on 1 June.
Don’t get your hopes up
The European and Swedish bond markets have been a key source of finance for Nordic property companies, so when investor appetite for bonds dried up during 2022, alternative debt funds believed they would finally get their foot in the door. Not so, says Ilija Batljan, chief executive of Samhallsbyggnadsbolaget, better known as SBB, a Swedish residential and social infrastructure company.
The business has a SKr10 billion (€879 million) bond debt pile to refinance over the next two years and does not see debt funds as a solution. “Debt funds will never get a foothold in the market. They are constantly hoping every time there is a crisis that they can establish here. But they are too expensive and property companies in the region don’t want to have collateral with people they don’t have a relationship with.” To find out how it’s managing to refinance instead, read more here.
The cost of success
Occupier retention has become a key component in retrofitting or upscaling office assets as the somewhat troubled sector has given a voice to tenants. UK and German cities have Europe’s highest office fit-out costs, according to Cushman & Wakefield.
Loan in focus
Data business downloads mega-loan
News of large, freshly minted loans have lately been rare. A quick glance at our latest lending data reveals the last loan that compared to the €725 million facility that ING Bank and a syndicate of lenders just issued to data centre business AtlasEdge, was in April last year – financing that backed the development strategy of another data centre business, Ark Data Centres.
In this instance, ING Bank worked alongside ABN Amro, Crédit Agricole CIB, Scotiabank, NatWest, Banco Santander and UniCredit Bank, which provided a loan that does two things: allows AtlasEdge to expand its property portfolio across markets including Germany, Spain and the UK, as well as undertake leveraged buyouts. Ron Huisman, chief financial officer at AtlasEdge, told Real Estate Capital Europe this group of lenders is keen to supply more debt in the near future.
So-called ‘edge data centres’ – facilities built close to where data is used – is what AtlasEdge specialises in and are assets that broker JLL identifies in its Data Centres 2023 Global Outlook as among the fastest growing subsectors of the data centre market.
Today’s Term Sheet was prepared by Lucy Scott, Daniel Cunningham, and Mark Mwaungulu with Randy Plavajka contributing.