Term Sheet: More UK property debt enters underperforming territory; AEW wins landmark victory; Nuveen prepares to hit debt fundraising trail

Welcome to the first edition of Term Sheet, the new weekly newsletter from Real Estate Capital, for valued subscribers only, landing in your inbox every Wednesday. Starting with a look at data on the UK’s underperforming property loans, AEW's legal win over non-payers of rent and Nuveen’s plans for a new credit fund.

They said it

“The market has reached the bottom and is going to stay there for a bit. There remains this idea of caution. Nobody wants to make a move until things get better, which will possibly be from 2022 onwards.”

Nicole Lux, lead author of The Business School’s UK Commercial Real Estate Lending Report: Year-End 2020, on her expectations for the UK property lending market following a 23 percent drop in origination during 2020.

What’s happening?

Below expectations
As well as a drop in origination in 2020, The Business School’s latest UK lending report showed ‘under-performing’ loans increased from 4.8 percent of the country’s debt pile to 8.6 percent over the year. It is a concerning figure, but context is needed. First, it covers all forms of covenant breach or default, with loan-to-value breaches most often cited. Second, there is a gulf in loan book quality between the smallest and largest lenders. The weighted average default rate for sub-£1 billion (€1.2 billion) loan books – which typically contain a large proportion of high-leverage loans, was 7.5 percent, compared with 2.4 percent for £5 billion-plus portfolios. The overall increase in the UK default rate from 3.2 percent to 4.6 percent indicates there are plenty of problems to be solved, but few expect a wave of distress anywhere near that seen after the global financial crisis.

Sign of the times
Is the end of forbearance nigh? For perfectly solvent occupiers using government protection measures to avoid paying rent, quite possibly so. AEW’s UK REIT announced the successful outcome of legal action taken against “two well-funded national tenants” to recover rent arrears. The REIT, managed by AEW, said following the ruling it was “confident of further recovery given the outcome of its successful application to the court”. It will also seek to recover legal fees incurred. The claims in this instance amounted to just £1.2 million, but bigger claims are in the offing. “AEWU has always made it clear it will take legal action against tenants if required, particularly well-resourced companies that it believes are able to pay their rent and have sought to take advantage of government legislation intended to protect financially vulnerable tenants,” the manager, which oversees many private vehicles besides, said.

Nuveen goes again
The pandemic may have made the fundraising process more difficult due to barriers to in-person meetings, but it has not deterred investment managers, like Nuveen Real Estate, from attempting to tap strong investor demand for debt. The manager is in the process of launching its third UK real estate debt fund, UK commercial property publication React News reported this week. It is understood the strategy will be officially launched by the end of summer. Like its predecessor funds, Global Real Estate Debt Partners – Fund III (UK) will be focused on the UK market and Nuveen is aiming to raise £400 million for the vehicle. Nuveen reached a final close of around £350 million on its second UK-focused real estate debt fund at the beginning of last year. For its first UK debt fund, Nuveen raised £300 million in December 2016.

Retail repositioning
When one of Europe’s best-known retail property REITs makes a hire to facilitate use changes for its real estate, it is worth noting. Hammerson, the London-listed property company known for its retail focus, has hired Harry Badham [his LinkedIn profile here] from AXA Investment Managers for the newly-created c-suite role of chief development and asset repositioning officer. Badham will oversee development teams working on ‘destination repositioning’ across Hammerson’s UK, Ireland and France holdings. Having cut his teeth on a mix of workspace, retail, leisure, civic and residential projects including 22 Bishopsgate and 6 Pancras Square in London, Hammerson CEO Rita-Rose Gagné [her LinkedIn profile here] sees the appointment as an ideal way to maximise value at a time when its main retail offering is experiencing serious headwinds. Converting retail to alternative uses is the focus of affiliate title PERE’s incoming cover story. Be sure to look out for it next week.

Data snapshot

Global debt fundraising keeps pace
According to the latest data from affiliate title PERE, the proportion of global real estate fundraising allocated to credit strategies during the first quarter of this year remained relatively consistent with 2020. The data show $4.6 billion was raised by managers from third-party investors during Q1, accounting for 14 percent of the overall fundraising total. That means, at the three-month mark, debt’s share of global real estate fundraising was only moderately down on the 17 percent recorded across 2020, when $20.9 billion was raised for credit strategies.

Loan in focus

Leumi’s UK hotels affair
Leumi UK, the London-based subsidiary of Israel’s Bank Leumi, has made its latest lending move in the covid-hit UK hotel market. The boutique bank has provided more than £135 million in new hotel financing in the country since the pandemic began, and is now helping bring one of Birmingham’s most iconic buildings back to life.

It has provided a £27 million loan to private investment firm Starwood Capital, to refinance the redevelopment costs of the Grand Hotel, Birmingham’s only five-star hotel, which is set to reopen in May. Covid-19 has caused temporary disruption to the hotel market. But financiers like Leumi remain confident in the long-term demand for high-quality accommodation in city centre locations.


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Today’s Term Sheet was prepared by Daniel Cunningham with Eugenia Jiménez and Jonathan Brasse contributing.


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