They said it
“We used to talk about cash-out refis. Now it is cash-in refis”
Lauren Hochfelder, managing director and co-chief executive of Morgan Stanley Real Estate Investing tells affiliate title PERE higher interest rates mean many buildings are not producing enough income to support the same level of debt and thus require capital injections.
Natixis proffers a version of fate
Ever since the failure of California’s Silicon Valley Bank, in March, the question this side of the Atlantic has been whether any of Europe’s real estate lenders will meet a similar fate. For this reason, the results of the European Banking Authority’s stress test exercise, due this month, will be eagerly awaited. French bank Natixis Corporate & Investment Banking has pre-empted this by running European lenders through the rigour of its own “severe stress test scenario”, the conclusions of which were shared during a webinar on 6 July.
It concluded two German specialist property lenders, Aareal Bank and pbb Deutsche Pfandbriefbank, could be under-capitalised if an expected loss rate of between 5 percent and 12 percent on commercial real estate exposures materialises. The projected losses, it explained, would leave the Common Equity Tier 1 ratio – which compares a bank’s capital against its risk-weighted assets – so low that neither bank would have enough provisions required by regulators to be able to distribute dividends to shareholders.
In a statement, pbb told Real Estate Capital Europe that the assumptions and figures in Natixis CIB’s presentation are “inaccurate” and included “major misrepresentations”. Aareal Bank declined to comment. For more on this story, read here.
Samy Lakhdari, bank analyst, Natixis CIB, also added a note of caution for all European lenders with exposure to the sector: “There is a crying need for banks to increase provisions as commercial real estate accounts for the highest share of non-performing loans in Europe for banks”.
KTCU to take credit
South Korea public pension fund Korean Teachers’ Credit Union has included credit as one of its key overseas real estate strategies for the next 12 months, according to affiliate title PERE. The investor is rebalancing its portfolio and plans to allocate about half of its new capital invested in overseas real estate in debt, 40 percent in value-add equity investments and the remainder in secondaries. Since April 2023, the pension has already committed to a global real estate fund for investments in both equity and credit, and a US real estate credit fund. Before this, KTCU had paused its alternative investments for 10 months due to interest rate hikes, an overallocation to alternatives because of the denominator effect and a short-term liquidity issue in its portfolio. Read our full coverage here.
Taking stock of UK REITs
Analysts at London-headquartered bank HSBC cut buy ratings across all the UK real estate stocks they cover to either ‘hold’ or ‘reduce’ on Monday due to near-to-medium term net asset value falls and refinancing risks. The bank also called the outlook for the market “particularly precarious”. HSBC moved its recommendations on leading UK REITs such as British Land and Land Securities from ‘buy’ to ‘reduce’ and ‘buy’ to ‘hold’ for heavy London-focused companies Great Portland Estates and Derwent London. “The latest inflation data followed by higher-than-expected increase in policy rates… point towards another round of asset price mark-downs across the real estate sector,” HSBC said.
Octopus extends tentacles in debt
There has been a strong focus on income forecasting from lenders as they aim to mitigate the risk of defaults. But London-based firm Octopus Real Estate’s proposed fourth vehicle will offer short-term loans on a retained or deferred basis, which enables interest to be rolled up and paid at the end of the term, rather than monthly. This makes the loan, in the immediate term, more affordable for sponsors, almost pressing the pause button on the increased debt costs for a period. Earlier this year, the lure of bridging in the UK attracted Bahamas-headquartered asset management firm Sterling Global Financial, with the firm saying that UK and European borrowers are both restricted on transaction volumes because banks take too long, and bridge finance is quicker. It added that this type of finance allows sponsors more time to wait on favourable market conditions before refinancing the traditional way.
A bridge too far
Real estate debt funds have been raising capital for property owners seeking to bridge their refinancing gaps in recent months. But not every borrower is likely to embrace what is on offer, says Antonio López Bodas, head of capital markets at pan-European manager Azora. He told affiliate title PERE that loans from debt funds were only affordable for high-yielding assets, explaining: “When you had rates at one percent or zero percent, you were only talking about the spread the bank was charging you. But now you need to add an additional 400 basis points or 500 basis points of the Euribor or LIBOR. Then if you charge another 400 basis points or 500 basis points… that these types of alternative lenders are charging, you are ending up financing at 10 or 11 percent. And there are not many assets that can be financed at 10 percent.”
Looping back on affordability
A counter view to the theory that debt fund capital will be too expensive for most borrowers is provided by evidence from transactions undertaken over Q2 2023 via Finloop, the digital debt marketplace co-founded by Nicole Lux. The start-up’s latest data, shared exclusively with Real Estate Capital Europe, showed a “significant surge” in financing transactions to €5 billion of deals on its platform during the period, driven by alternative lenders. “Debt funds are the most active lender group,” it reported, adding that “many banks have paused… debt funds are also keeping the development market active”. Finloop also noted a significant improvement in debt affordability, due to the combination of reduced Loan-to-Value ratios and increasing yields “improving day one ICR levels”. Look out for more coverage of this story on our website.
Offices drag on German investment
German investment volumes in the first half of this year represented a 53 percent decline on the transaction volumes achieved in the same period last year, according to real estate consultant JLL. The firm attributed this to a lack of large transactions, particularly within the office sector, as the country tries to come to grips with rising interest rates.
Loan in focus
Three banks, one €275m loan
CBRE Investment Management, the New York-headquartered real estate manager has secured a €275 million loan from a consortium of lenders – in part to refinance maturing debt and in part to finance acquisitions in the logistics sector. Dutch lenders ABN AMRO and ING and French bank Crédit Agricole CIB provided the unsecured term loan with an accordion provision of up to €500 million. The three banks have structured the facility to become a sustainability-linked loan during 2023. In a statement, CBRE IM said the financing will enable further growth of its logistics strategy, and also position it to “access multiple debt capital sources”.
L&G and RBS provide £177m refinancing to UK REIT
UK real estate investment trust PRS REIT has sourced a £177 million (€207 million) revolving credit facility refinancing from London investment management firm Legal and General Investment Management and UK bank Royal Bank of Scotland. The RCF, which was previously provided by UK banks Lloyds and RBS, had been originally due to mature in February 2023 and was extended on the same terms to mid-July 2023. The REIT has secured a £102 million (€119 million) facility of fixed-rate debt for 15 years, and a further £75 million (€88 million) of floating-rate debt for two years – with an interest rate cap on the floating rate debt to hedge against downside risk on further interest rate movements.