Term Sheet: The impact of Russia sanctions on lending, Lone Star’s Grayken speaks, sustainable London scheme attracts £400m loan

The author of the Bayes report says sanctions against Russia are already impacting real estate lending markets; Lone Star Funds’ publicity shy owner John Grayken gives his first in-depth interview and discusses the opportunities ahead; Allianz Real Estate’s backing of a 500,000 square foot London development demonstrates lender appetite for sustainable projects; and more in today’s briefing, exclusively for our valued subscribers.

They said it

“A sponsor might be considering light-touch refurbishment or a comprehensive programme, and our loan might nudge it towards the latter”

Gregor Bamert, head of real estate debt at Aviva Investors, argues that the company’s sustainable loans can have a material impact on borrowers’ plans for their assets. Read the full interview here.

What’s happening?

Sanctions impact
According to one market observer, the ripple effect of international sanctions against Russia is already being felt in real estate lending markets. Nicole Lux, senior research fellow at Bayes Business School, and lead author of its biannual UK property lending report, said the hunt for Russian oligarch wealth is leading to a change in lender behaviour towards assets where the ultimate beneficial owner or shareholder is Russian. “We have already seen certain European property companies and property funds being rejected for refinancing by banks,” Lux said.

Companies linked to activities including sales of weapons or from blacklisted countries will not be financed, she added. “At this stage, it is too early to say how many companies are already being affected by this, but it is quite safe to say this could add to a growing list of property portfolios that have been liquidated in a short space of time. All this will add further downward pressures on pricing as organisations with such investments seek quick sales of assets.”

Points to consider
In a comment piece last week, affiliate title PERE raised four points for the private real estate industry to consider amid the Ukraine invasion. Here is a summary [read in full here, with further coverage of the impact of the war here].

  1. Capital flows into Russia and Ukraine are minimal and will grind to a halt. But managers and investors will also pause to consider central Europe commitments.
  2. Higher oil prices will bring further inflationary pressure. It will need to be factored into development-focused business plans.
  3. As lenders start to worry about losing money amid falling pricing, financing may become more constricted.
  4. Additional inflation will need to be factored into the underwriting of existing investments – especially in Europe, which sources 40 percent of gas from Russia.

US market response
Manus Clancy, a senior director at New York-based analytics provider Trepp, last week told affiliate title Real Estate Capital USA that the volatility in global financial markets is only dealing glancing blows to US commercial real estate debt activity at the moment. He said the impact of the conflict is likely to be nuanced, with US commercial real estate lenders and investors bracing for the prospect of higher inflation as oil prices rise and more disruptions hit the global supply chain.

The conflict’s impact on real estate debt will play out over the medium-term, Douglas Weill, founder and co-managing partner of Hodes Weill & Associates, told REC USA. “There’s no doubt that institutions are a bit more cautious at the moment. But at the same time, dollar-based assets and hard assets like real estate and strategies with a strong yield profile are safe havens for any institutions. With that said, in times of uncertainty, institutions tend to slow down, be more cautious and take a wait-and-see approach.”

MIPIM fallout
MIPIM, the world’s largest property conference, is scheduled to return to Cannes, France, next week after a three-year absence. While real estate professionals are expected to descend upon La Croisette en masse, Russian delegates will be noticeably absent from the crowd. The Russian pavilion – which accounted for less than 2 percent of exhibitors at MIPIM in 2019 – will be missing from the Palais des Festivals exhibition centre this year.

In a statement last week, MIPIM organiser RX condemned the Russian invasion of Ukraine and stated there would be no Russian exhibitors at MIPIM, in accordance with local government sanctions. RX also added that Russia’s Sputnik V covid-19 vaccine had not been approved for entrance into France, thereby barring industry professionals that had received the vaccine.


Compensation pressure
For the third year running, London-based executive search firm Sousou Partners exclusively provided REC Europe with the findings of its survey of compensation packages across the European real estate finance industry. The main takeaway: as more organisations have set up stall in Europe’s real estate lending market, competition to hire the industry’s debt specialists has intensified, leading to bigger salaries and bonuses.

As more non-bank lenders have entered the market, driven by investor demand for access to real estate debt and a reduction in banks’ appetites to finance property, competition for Europe’s limited roster of seasoned debt professionals has intensified.

“Hiring has been seriously busy at every level of seniority, at every point of the risk curve, across equity and debt – but it has been most acute in debt,” said Jamie McKinnell, partner with Sousou. To find out how much salaries and bonuses have increased, read our full coverage.

Key person

Grayken’s outlook
Lone Star Funds, the Texan private equity firm, made its mark in European real estate markets after the financial crisis when it pounced on huge volumes of non-performing loans. However, its founder and owner, John Grayken (pictured), is a person few in the industry have encountered. An intensely private individual, Grayken avoids publicity. But he made an exception in February, agreeing to an interview with PERE after winning the Lifetime Achievement Award at its global awards.

The full interview can be read here. In it, Grayken hints where he sees money making opportunities as global real estate markets recover. Structural shifts across asset classes bring opportunities but also the risk of making wrong calls, meaning deep analysis of the subsectors into which most asset classes can now be divided is paramount, he explained.

And given Grayken’s propensity for finding value in areas of dislocation, expect to see Lone Star work through segments within traditionally popular asset types such as offices and retail. In doing so, it is possible the more controversial entity-level transactions of the firm’s past will be less prominent as accelerated themes in real estate leads to dislocation at the asset level instead.

Data snapshot

Rental growth
In its latest survey of independent forecasts from 19 organisations, industry body the Investment Property Forum reported UK all-property average rental growth of 2.5 percent in 2022 – more than 90 basis points up from its November survey. A link to the report is here.

Loan in focus

Allianz gets behind London net-zero development
Allianz Real Estate provided around £200 million (€241 million) of a £400 million development financing facility announced this week for a scheme that its backers say is the largest speculative development in London’s West End to date. Welput, the specialist central London office fund managed by US manager BentallGreenOak, sourced the finance as it recapitalised its ownership of the 105 Victoria Street site in the UK capital, ahead of the start of construction in July.

In the recapitalisation, Canada’s Public Sector Pension Investment Board co-invested alongside existing Welput investors. As well as being operationally net zero, the backers of the 500,000 square foot office-led scheme are aiming to achieve net-zero embodied carbon using innovations in ultra-low carbon construction, so the carbon emitted during construction is offset within six years of the building’s operations in comparison with the retention and refurbishment of the existing building.

Today’s Term Sheet was prepared by Daniel Cunningham, with Samantha Rowan and Jonathan Brasse contributing