Term Sheet: Savills’ take on the lending market, Tristan’s next fundraising targeted, key views from CREFC Europe’s event

Savills sees stress but not significant distress in the loans market; Tristan Capital Partners finds conditions ripe for a second debt fund. At CREFC Europe’s Spring Conference, refinancing challenges, the allure of credit strategies and alarm about the US rank high among talking points; and more in today's briefing, exclusively for our valued subscribers.

They said it

“We’re seeing lots of lenders going back to their core clients. So [opportunities] that they might have been interested in with new clients, they just don’t want to touch at the moment”

Kirsty Wilman, chief operating officer, real estate, at manager Federated Hermes, tells the ULI UK annual conference in London, on 11 May, that debt providers are more selective in today’s market

What’s happening?

Stress, not distress
Savills, at its 35th annual Financing Property event in London on Wednesday, presented a mixed picture of debt market conditions. Nick Harris, head of UK and cross-border valuations at the real estate consultancy, said there is clearly stress in the loans market, but not significant distress for now. “We are in the early days of how lenders will deal with stretched capital structures,” he said.

In cases, the cost of financing is more expensive than the entry yield, Harris said. However, he added that price discovery for prime assets is relatively far advanced, in the UK more so than in continental Europe. By contrast, price discovery for non-prime assets remains a work in progress, he said. Overall, prices have corrected faster than in previous downturns.

Borrowers have also been quick to act. He pointed to Bayes Business School figures that showed around 65 percent of lending last year was in refinancing deals, of which around half were with new lenders. Keep an eye out for further coverage of the event on recapitalnews.com.

Tristan goes again
Regular readers of Term Sheet will have noticed in recent weeks a slew of managers aiming to raise debt funds. The spotlight this week is on investment management firm Tristan Capital Partners, which is aiming to raise up to €750 million for its second pan-European debt fund, Tristan Income Plus Strategy Two.

Dan Pottorff, head of debt investment at Tristan, told Real Estate Capital Europe: “[We are] at a very interesting point in the cycle where higher rates and imbalances in the supply of credit could generate historically attractive risk-adjusted debt returns.” Others in the sector share the view, with a growing list of credit funds in the market, albeit at a time when the denominator effect is making fundraising a challenge.

Hey big extender
Two of real estate’s biggest managers have managed to secure extensions to a total of £780 million (€897.8 million) of securitised loans in the UK market, prior to maturity. Bisnow reported commercial mortgage-backed securities bondholders had been informed in each case the borrowers had exercised options to extend the loans.

New York-based Blackstone extended two loans: a £238 million loan that was part of a larger facility used to fund its purchase of student accommodation platform iQ in 2020; and a £323 million loan used to refinance a portfolio of industrial assets. Meanwhile, Toronto-based Brookfield Asset Management extended a £211 million loan against nine retail parks in the country purchased in 2021.

Playing the field
PGIM Real Estate, the real estate investment management arm of New Jersey-based Prudential Financial, has promoted Jamie Shen to head of agriculture. Shen – formerly chief investment officer and head of the company’s agricultural equity business – will, according to the company, “expand a combined debt and equity agricultural platform”.

Bryan McDonnell, head of US debt and agriculture and chair of global debt, said the business had “ambitious plans” for its agricultural business, which includes farmland and timberland, and has assets under management of $10.5 billion. The rationale, he added, was that agricultural assets provide stable, long-term income and act as an inflation hedge. “These qualities are fuelling strong demand for what remains a nascent asset class,” McDonnell added.


Industry gathering
Real estate debt specialists gathered on Tuesday at industry body CREFC Europe’s Spring Conference in London. Panellists discussed the challenges and opportunities facing the credit space. Here are some of the major trends on the table:

  • The need for refinancing: Panellists acknowledged the large volume of upcoming loan maturities, with a spike in 2024. Lenders and borrowers will work together to find solutions to stressed situations, they agreed. However, lenders will not be able to sit on problem loans in a higher rate environment, and some sponsors will be required to inject fresh equity into deals. There will be instances of sponsors opting to default rather than put up fresh capital, one warned.
  • The value of real estate credit: Amid an ongoing correction in capital values, debt represents good value for investors, panellists argued. While it was acknowledged that the fundraising environment is tougher, due in part to investors being hamstrung by the denominator effect, one panellist said equity market participants are typically looking at debt opportunities.
  • US contagion risk: Europe was cited as benefiting from a functioning real estate financing market, particularly in comparison with the US, where financing offices in particular has become more difficult. One panellist said there is a danger of contagion risk from issues in the US banking system but argued the impact will not be severe.

Below the surface
At a time when lenders are laser-focused on sponsors’ income streams, research from broker BNP Paribas Real Estate may make uncomfortable reading. The property consultant said a significant volume of grade A big-box logistics space has become available in the UK from major owner-occupiers such as Amazon. Of the 30 million square feet of available big-box units, more than 4.1 million square feet has been released back into the market via subleasing. The consultant added that take-up for 100,000 square foot-plus units was down 49 percent year-over-year in Q1 at 6.8 million square feet.

There is also talk in the market of increasing subletting by tech tenants in the office sector, albeit to a lesser degree than in the US. While more subleasing does not immediately spell cashflow problems for lenders, it does raise questions about how sticky income is for some properties.

Data snapshot

The big get bigger
Global assets under management in the real estate industry fell to $4.1 trillion in 2022, per the Fund Manager Survey 2023 conducted by global industry bodies ANREV, INREV and NCREIF, published last week. The findings show the trend of capital concentration among the largest managers continues to deepen, with the top 10 managers globally responsible for 47 percent of total AUM, up from 41 percent in 2021.

Loan in focus

Aerial view on the central square and Sukiennice in Krakow.

Panattoni’s Polish sheds loan
Polish lender Bank Gospodarstwa Krajowego has provided European logistics specialist Panattoni Europe with a €64 million loan to fund the development of a complex for Poczta Polska, the state postal administration of Poland. The loan will fund the development of the asset in Radzymin, as well as two buildings within the developer’s Panattoni Park Grudziądz.

Panattoni has an extensive track record in the Polish market, having delivered more than five million square feet across industrial parks in towns and cities including Toruń and Bydgoszcz as well as build-to-suit centres in Brześć Kujawski and Grudziądz, where construction was launched last year on Panattoni Park Grudziądz – the first industrial complex in the area.

Today’s Term Sheet was prepared by Daniel Cunningham, with Lucy Scott, and Mark Mwaungulu contributing