They said it

“We signed a contract to buy this particular office building and we sent out a proposal to all 66 of our lenders. We got back one counterproposal”

Robert Morse, executive chairman at Bridge Investment Group, illustrated the distress in the US office market at affiliate title PERE’s Americas conference this past week.

What’s happening?

From Brunswick to Niam
In a rare M&A deal for the Nordic non-bank real estate lending market, the debt business of manager Brunswick Real Estate Capital has a new identity, having been acquired by Stockholm-based private equity firm Niam – in a deal announced this week. As well as having a new name – the business is now known as Niam Credit – it has plans to expand from its senior lending focus into subordinated lending next year.

But CEO Pontus Sundin says lenders are reassessing the nature of such opportunities in a riskier climate. Sundin told Real Estate Capital Europe: “Two years ago, a senior lender would offer up to 75 percent [loan-to-value], leaving subordinated lenders to sit on top of that. But senior debt is now offered at around 50 percent. As a consequence, we are seeing a parallel shift from junior lenders which are seeking to position themselves at lower levels as well. The big question is what kind of risk a junior lender would take today – it is a moving target currently.” Look out for more coverage of the acquisition at www.recapitalnews.com

Westbrook eyes UK
While many lenders have pulled back amid current market conditions, examples of managers getting involved in real estate lending markets to capitalise on higher loan pricing keep coming. Last week, React News reported US private equity firm Westbrook Partners has launched a UK lending strategy. The firm has a track record of lending in the US, and it has also lent in continental Europe, and sparingly in the UK before now.

But, according to React News, the firm is making a more strategic play for the UK lending market, with the aim of deploying funds from its $2.5 billion Westbrook Real Estate Fund XI in whole and mezzanine loans, at lending rates from 5 percent and loan-to-values of up to 80 percent. For some, liquidity constraints clearly represent opportunity.

CBREIM focuses on existing loans
Not every lender sees now as the time for expansion. It is understood that CBRE Investment Management’s UK-based credit business is not currently expanding beyond its existing investments. In 2019, the manager acquired London-based debt specialist Laxfield Capital to form its UK lending arm [read coverage from the time here]. The business has since pursued lending strategies including through a whole loan fund and an evergreen senior credit fund, which was launched in April.

Last week, CoStar News published an article in which it stated CBREIM had denied it is closing the debt platform. CoStar went on to say the denial came after three unidentified sources said the manager was discontinuing the business. A spokesperson for CBREIM reiterated to Real Estate Capital Europe that the company is not shutting down the debt platform. Co-heads Emma Huepfl and Alexandra Lanni are understood to still be with the business, as is head of origination Chris McMain. The spokesperson said: “We have not shut down the UK credit business, and we continue to focus on serving the needs of our valued clients and managing our existing book of loans.”

EU backs Vonovia’s retrofit push
The European Investment Bank, the EU’s lending arm, has loaned Germany’s largest residential landlord €600 million of capital to finance energy efficiency improvements across its vast portfolio. The EIB issued the eight-year unsecured loan to Vonovia, which is seeking to make its portfolio climate neutral. It follows the EIB’s pledge during COP27 to lend on projects aimed at a socially inclusive transition to low-carbon societies.

Vonovia, which owns 488,472 residences in Germany, will use the capital to insulate roofs, facades and heating systems powered by renewable energy, adding that an increase in rents to cover the costs of upgrading the homes would be “more than compensated for” through lower heating costs. The EIB, which plans to provide €24.7 billion of green loans by the year end, said it hoped the deal would encourage other investors to finance energy renovation.

Schroders keeps score on impact
Schroders Capital has launched its first diversified real estate impact fund, focused on addressing both social inequality and climate change. The firm has developed its own scorecard to measure the change generated by each fund investment, based on what it calls a “context report,” or a geospatial analysis of an asset using multiple metrics. Some of the fund’s core key performance indicators include the value of the assets located in areas of above-average deprivation; the amount of workspace to voluntary community and social enterprises, and small and mid-size enterprises; and the number of affordable and social housing units created.

However, “there also needs to be qualitative measurement and understanding as well”, points out Chris Santer, impact fund manager at Schroders Capital’s real estate business. “Sometimes the things we can measure don’t always capture everything and don’t always go to the heart of everything that’s been achieved by investing in a deprived area.” Read more about the new fund here.

Investing in a new, volatile normal
Predictable real estate outcomes may be a thing of the past. Historically, “asset classes performed in a very tight band, growth was predictable and there wasn’t a lot of variation in outcomes”, John Brady, head of the global real estate group at Oaktree, recalled in a video roundtable published last week. Now performance has widened significantly between “darling” sectors like industrial and multifamily and “not darling” categories such as retail and office. Consequently, “it is going to be harder to pick the winners and losers in a world of accelerating change,” he said. “I think we’re entering a period where investing is going to be more difficult and you have to be discerning and willing to accept that there’s significant risk.”

For Brady’s colleague Justin Guichard, co-portfolio manager of real estate debt, the best path through this period of volatility is to make less risky bets, or “focusing on singles and doubles rather than trying for home runs and tolerating strikeouts”.

Trending

Under pressure
Property companies with potentially over-priced assets bought at low yields, and with valuations that cannot be justified by rental growth, may need to re-assess their balance sheets, according to Fitch. In a research note, the rating agency said most European property companies which it rates have long-dated, fixed-rate debt, meaning rising rates will only affect their cashflow gradually, as debt matures. However, it added increased interest rates will “adversely affect valuations in the sector”.

Fitch updated its EMEA property companies’ forecasts using higher rates assumptions, with no rating affected by near-term maturities creating marked refinancing risk, a sudden change in interest coverage ratios, or an immediate increased average cost of debt. But it added some sectors, such as residential for-rent companies, are exposed as the cost of debt creeps nearer income yields. “Property companies may return to the environment where their typical interest cover ratios could reduce to about 2x, similar to the level last seen before the global financial crisis in 2009, compared to current interest coverage ratios comfortably above 5x,” Fitch wrote. For more, click here.

Angst-ridden arithmetic
Savills believes the “arithmetic” in the industrial sector is “harder to justify than any other sector” at present. In its weekly global capital markets review, the property adviser attributed a 30 percent decline in investment volumes during Q3 to the “very low starting point for yields”, which were as low as 4.1 percent in Europe during Q2, and a rapid repricing of debt. Savills predicts occupational demand will moderate in line with the slowdown in consumer spending, citing the US as one country where this dynamic was playing out, with leasing activity down.

“All this means we are at a cyclical peak in inventories, and so it is difficult to see how, in the current environment, major retailers will be taking on more storage capacity,” said Savills. “If anything, occupiers are likely to reduce their requirements, or attempt to sub-lease existing space, especially given margins are being squeezed by higher wages, energy prices and rising warehousing costs.”

Capital markets decelerate… but not everywhere
Widespread sentiment in the private real estate industry will tell you that the capital markets have experienced a slowdown. Third quarter data, however, paints a more nuanced picture. In the US, debt origination activity is down 12 percent year-on-year, according to commercial real estate services firm Newmark’s Q3 2022 capital markets report. However, in two segments of the market – asset sales and mergers and acquisitions – activity has proved resilient, both compared with the same period last year and the three years prior to covid. In fact, debt issuance for real estate M&A is up 114 percent versus last year and 248 percent versus the average yearly figures between 2017 and 2019. However, both construction and refinance activity are down 20 percent and 22 percent, respectively, versus Q3 2021, highlighting the areas of the market where the pullback in financing has hit hardest.

Real Estate Capital Europe Awards 2022

Time is running out to make a submission
There is not much time left to tell us why your organisation ought to be considered in one of the 37 categories of the Real Estate Capital Europe Awards 2022. The deadline for submissions is midday UK time, on Friday 25 November. Click HERE to access our submissions form. To recognise the organisations and deals that have stood out during a tough year, the awards are bigger than ever before. There are four new categories – including Social Impact Lender of the Year: Europe, to recognise those striving to make the ‘S’ in ESG a priority. We have also introduced four sector-focused categories: Lender of the Year – Offices: Europe, and equivalent awards for logistics, retail and residential. But our editorial team needs to know your organisation’s achievements to make the correct decisions when compiling shortlists. Don’t miss out!

Data snapshot

Retail bounces back in Europe
Investment volume for retail assets in Europe has rebounded by 20 percent to €44.2 billion over the past 12 months as investors sought to diversify outside of offices, according to a BNP Paribas report. In France, for example, the €4.3 billion investment volume in retail in the first nine months of 2022 is already 38 percent higher than the full-year figure in 2021.

Loan in focus

Regional retail refinancing
UK retail has been a challenging sector for several years, particularly in regional locations. But a lending deal announced this week suggests some see potential in its future performance. Specialist lending bank Leumi UK agreed a £30 million (€35 million) refinancing loan to sponsor Magnetar Capital for the Yate Retail Shopping Centre and adjacent Riverside Retail Park in Yate, a small town near Bristol. The properties’ location and their varied selection of stores means the site offers an “attractive convenience-led shopping experience” and a resilient performance during the covid crisis, according to Leumi. Across the two schemes, retailers include supermarket Tesco, high street stalwarts Marks & Spencer and Next, plus convenience brands including Poundland. A mix of tenants that caters for a range of local shoppers appears to be an attractive selling point for some lenders.

Today’s Term Sheet was prepared by Daniel Cunningham, with Lucy Scott, Peter Benson and Jonathan Brasse contributing