They said it
“The current misery is clearly self-inflicted”
Thomas Kallenbrunnen, managing director at German manager GARBE Institutional Capital, commenting in a blog post how managers’ prior positioning of real estate as a fixed-income alternative has created many of the issues the sector is facing now
Interest rates dominated many real estate industry discussions last week, including at the PERE Network Tokyo Forum 2023, hosted by affiliate title PERE, where one speaker highlighted the importance of risk mitigation in the face of a potential rate hike in Japan. Indeed, interest rates were cited as one of the greatest investment risks today by 37 percent of respondents in Goldman Sachs Asset Management’s 2023 Private Markets Diagnostic Survey, which was conducted in June and July and published on Monday. Those respondents could breathe a collective sigh of relief as multiple central banks – including the Federal Reserve, Bank of England, Bank of Japan, and Swiss National Bank – opted to hold rates steady last week.
On the BoE’s rate decision, Investec Real Estate executive Gordon Milnes said he hoped interest rates in the UK had hit a peak. “Now we need some further visibility on potential interest rate cuts, which should act as a catalyst for a rapid bounce back in real estate activity levels,” he said. In the US, however, unchanged inflation projections point to higher median expected Fed funds rates for year-end 2024 and 2025. “There would only be scope for modest rate cuts in 2024,” Schroders chief economist Keith Wade wrote in a post on Friday.
Debt across the pond
While many believe an end to rate hikes is in sight, attractive risk-adjusted returns generated on the back of higher debt costs continue to entice managers into the European property lending market. This week, it was announced that Atlanta-based investment management firm Ardent Companies has expanded its real estate debt business to the UK.
The manager has hired Sunny Lakhtaria [his LinkedIn here], who counts KPMG and the former UK development lender Urban Exposure among his previous places of employment, as its UK head of debt. Ardent has lent against real estate in the US through its Ardent Financial Fund series and has built a $2 billion loan book. The firm launched its fifth debt fund in February, targeting $500 million in equity. In the UK, its new platform will target loan origination and the purchase of existing debt across sectors, but with a focus on residential development.
Banking on private markets growth
In a signal that Germany’s major banks see an opportunity in the institutional private debt market, lender Helaba last week announced the launch of HLB Private Markets, a debt fund platform. The bank also announced a first close on its first vehicle, an infrastructure debt fund, for which it raised capital from a Canadian investor. It will be the first of a series of debt funds with target volumes of up to €500 million.
At this stage, HLB Private Markets does not have a real estate debt fund. But a source with knowledge of the situation said real estate debt funds are eligible to be included in the platform and are an additional asset class Helaba is considering in the future as part of this platform.
“The launch of HLB Private Markets signifies a pivotal chapter in Helaba’s development to serve as a catalyst for sustainable strategic growth for both our investor partners and our clients. The platform offers a unique access to Helaba’s structuring and analytics expertise via co-investments alongside Helaba,” said Christian Schmid, member of the board of directors at Helaba. Keep an eye out for further coverage.
Nuveen takes the wheel
Manager Nuveen Real Estate has bought a senior loan secured against 1 Portsoken Street – an office block in the City of London, after the borrower failed to find refinancing, according to React News. Nuveen, which holds a £20 million (€23 million) junior loan against the property, bought Apollo Global Management’s £70 million position, commercial real estate news provider React reported, a purchase that gives the manager control of the debt held against the asset. The debt for the 230,000 square foot property has been in default since 2022, React said.
The asset is understood to be worth around £155 million, the publication added – falling from around £220 million in February 2022. It is understood to be controlled by New York businessman Abraham Schwartz, but is held by four Luxembourg companies. Accounts filed in August 2022 by one of those companies, AE Portsoken Parent, stated the property would be sold if a refinancing of the existing debt was not agreed.
Single family financing
The institutionally-backed single family rental housing model remains in its infancy in parts of Europe, including the UK. However, a major financing announced this week suggests lenders are ready to back it. Manager PineBridge Benson Elliot has announced it has sourced £300 million (€345 million) of debt facilities to finance the acquisition of 34 sites, totalling 2,600 units, as part of its UK SFR aggregation strategy, through subsidiary Sigma Capital Group. “We have witnessed a significant interest from lenders, even amidst the challenges of the current rates landscape,” said Joseph De Leo, managing partner at PineBridge Benson Elliot.
Bridge to Europe
London-based private credit firm Arrow Global has appointed Toni McDermott as its chief investment officer of credit and direct lending. As part of her role, she has been tasked with expanding the firm’s bridge lending activities into continental Europe. McDermott, who has joined from US bank Morgan Stanley, plans to expand Arrow’s bridge lending strategy into Italy, the Netherlands, Portugal and Ireland. Capital for the strategy will come from various sources, including the firm’s €2.75 billion Arrow Credit Opportunities II fund. McDermott told Real Estate Capital Europe its exposure to bridge lending is currently limited to the UK, through its subsidiary, the London-based residential development lender Maslow Capital. Arrow will look to provide loans between €300,000 to €10 million at terms of between three and 36 months.
Equity plays catch-up
This year, if asked where they would place their bottom dollar, many real estate investors and managers would say in debt, due to the inflated return profile of the asset class, and its defensive nature. However, from an absolute return standpoint, equity is closing in on debt returns, according to investment manager Aviva Investors, the investment management arm of UK insurer Aviva. Using its own proprietary data, the firm highlighted that the risk around real estate equity has somewhat abated as a broad repricing has largely occurred across asset classes.
It said the best performing property equity returns in Europe are within the UK’s industrial sector, which it forecasts will generate returns between 7-8 percent over five years. However, the firm still sees real estate debt as a sound investment, with projected returns between 7-8 percent, and less risk than equity.
Goldman readies for a ‘collision’ opportunity
Institutional real estate investors should brace for a “front-loaded cycle of activity” as a result of a “collision” between a “much higher rate environment” than before and “huge wall of loan maturities in the next 12 to 18 months”. So said Jeff Fine, global head of real estate client solutions and capital markets at Goldman Sachs Asset Management last week.
Presenting at the bank’s Alternatives Survey webinar on Thursday, Fine predicted “an incredibly attractive vintage, with markets adjusting to higher rates and a rapidly evolving economy”. But he warned how investors, many of which have needed to adjust to rapidly shifting valuations too, are hesitant to be among the first movers in the new cycle. “LPs remain cautious. They have existing exposures they need to work through, they want to see more actionable evidence of dislocation-driven situations and their returns expectations are rightly very high,” he said.
His comments chimed with the webinar’s opening slides, which demonstrated how the majority of respondents felt real estate was overvalued, more than for any other alternative asset class apart from private equity. Click here to access the webinar.
A storm is brewing
In Germany, where the decline in transaction volume has been steeper than any other major market in Europe, distress is yet to manifest to any meaningful degree. But market participants told affiliate title PERE this is the calm before the storm and they expect a wave of heavily discounted assets to come to market if conditions continue.
The wide bid-ask spread, the deep yield compression and low loan margins of the past decade, developer insolvencies, the mature investment programmes of the country’s investors and their higher-than-average allocations to the asset class are some of the key reasons why Germany is thus touted. Lenders say they are ready to support borrowers when debt maturities bite. Not everyone is convinced this will be possible. “The numbers just don’t add up to a long-term hold for some owners,” says Marcus Lemli, CEO Germany and head of investment Europe at broker Savills. Read more in PERE’s latest analysis.
Since June 2022, office values have fallen furthest in Amsterdam when compared with other cities in Europe, according to MSCI data analysed by consultant BNP Paribas Real Estate. Office values in the Dutch city declined by 23.5 percent year-on-year between Q2 2022 and Q2 2023.
Loan in focus
Green loan for indebted Heimstaden
Sweden-headquartered residential property company Heimstaden Bostad has raised €700 million from a consortium of lenders to help it manage its debt liabilities, as well as to finance investments in thermal insulation, the installation of heat pumps and a shift to renewable fuel across its Czech residential portfolio.
The company secured the loan from UniCredit Bank Czech Republic and Slovakia, which acted as mandated lead arranger and sustainability co-ordinator, alongside the European Bank for Reconstruction and Development and Czech bank lenders – Ceska Sporitelna, Ceskoslovenska obchodni banka and Komercni banka, as well as Italian lender Intesa Sanpaolo and Vienna-headquartered Raiffeisenbank. Heimstaden’s chief executive officer Helge Krogsbøl said the loans would strengthen the company’s balance sheet. On September 22, rating agency Fitch put the landlord on negative rating watch, citing the rising cost of interest on its debt and slow deleveraging. Heimstaden Bostad – a subsidiary of Heimstaden AB – has $2.5 billion of debt maturing in 2024.