They said it
“In many cases, on [the] equity side of the business, especially for transitional assets, we’re not borrowing at all.”
Michael Zerda, co-CIO and head of debt and value-add strategies, Europe, at LaSalle Investment Management, tells Bloomberg TV that his firm will only borrow once it has implemented near-term business plans on assets, and urges others to be highly selective about who they borrow from in today’s market.
What’s happening?
Mixed MIPIM mood
MIPIM, real estate’s annual Cannes gathering, is into its second day and Real Estate Capital Europe is there. The mood is more positive than last time the industry gathered – at EXPO Real 2022, when sharply rising rates had stopped the market in its tracks. However, news of US bank failures has tempered some delegates’ confidence that greater stability lies ahead. Here are some observations from the French Riviera:
People are absorbing news of the Silicon Valley Bank and Signature Bank collapses: Some argue the failures will not undermine the wider banking system and European real estate lending is unlikely to be materially affected. Others say it is too early to take a view on likely repercussions. The news is not dominating conversations, but it is clearly on peoples’ minds. One likened it to a ‘fire drill’ for banks.
Lenders’ outlook is cautious but somewhat optimistic: Debt is more widely available than in Q4, most agree, albeit on conservative terms. Lenders acknowledge the impact of higher interest rates on yields is yet to fully play out. However, some point to an undersupply of quality, sustainable property in many markets, and upward pressure on prime rents, as reasons to keep faith with financing real estate.
There is a watching brief on distress: Debt specialists continue to report limited distress in the sector. But many expect more to come. Lenders and borrowers are said to have so far been co-operative in stressed situations, with lenders extending loans if sponsors are still receiving sufficient income. Difficult discussions about equity injections or partial prepayments of loans are happening, some add.
Everybody is focused on refinancing: The bid-offer gap remains wide enough to prevent investment activity. In lieu of acquisition financing, lenders see refinancing as their main source of deals. Borrowers are busy trying to get ahead of loan maturities. But before they do a refinancing, lenders are scrutinising cashflow – debt yield is crucial to them.
Offices are challenging, but not off lenders’ radar: A widening gap between prime and secondary property is widely noted, particularly so in the office sector. However, some bankers insist offices will remain a big part of their thinking. Companies want high-quality, inner-city stock as they aim to lure staff back. That is keeping occupancy up across Europe’s central business districts, they insist.
The initial SVB fallout on real estate borrowers
“There were many fund managers who did not sleep well this weekend.” That was the comment Roger Singer, partner at law firm Gibson Dunn, shared with PERE in the aftermath of the Silicon Valley Bank’s collapse on Friday. It was the second largest bank failure in US history. Amid the initial fallout, borrowers were unable to communicate with anyone at the bank as of Monday morning.
“There’s theoretically an FDIC line, but no one picks it up,” according to one source familiar with the matter. By contrast, Signature Bank, a US regional bank that shut down on Sunday, still had people at work and answering the phones, the source said. Meanwhile, one manager told investors it had “an atypically large cash balance” of $30 million in one of its fund accounts at SVB and was “hopeful there will be a majority, if not total, recovery of the dollars currently at risk,” in an email seen by PERE. For more on the short-term and longer-term impact of the bank failures on the private real estate industry, check out our coverage here.
CIM expands property credit business into Europe
US-based CIM Group is expanding its credit business into Europe, following the opening of its UK office in 2021.
It launched its European Real Estate Debt Solutions business to build on the firm’s existing US debt platform, through which the firm originated more than $3.8 billion of commercial real estate loans last year.
The firm’s new division will look originate senior secured loans ranging between £75 million (€85 million) and £200 million on transitional assets.
“On a risk-reward basis, lending is now as good of a business as I have seen it be in my career,” Richard Ressler, co-founder and principal, told Real Estate Capital USA. Read more here.
Trending
Shallow recession in the UK
DWS forecasts a “shallow recession” in the UK, according to its UK Real Estate Strategic Outlook report for Q1 2023.
It highlighted that, in the short-term, it expects a recession in the UK this year following a €8 billion investment volume in Q4 2022, a decline of 32 percent quarter-on-quarter and 65 percent year-on-year.
The firm expects the recession to be more “pronounced” than the rest of Europe. However, the shining light remains Central London’s prime office market due to its global occupier base and less dependence on the wider UK economy.
It added that the shortage of available prime offices is likely to be exacerbated by rising construction costs and economic uncertainty therefore yielding rental growth in the medium-term.
Data snapshot
Americans inbound
North American buyers are increasingly attracted by pricing levels in Europe’s commercial real estate markets, according to Savills, a trend it forecasts will continue in the coming months, as cross border flows increase. The adviser found that, in 2022, North American investors invested €48 billion versus €36.6 billion by European buyers. Against the five-year average for 2017-21, this represented a 31 percent increase for North Americans and a 28 percent decrease for European buyers.
Loan in focus
Cheyne refinances London scheme
Despite the challenges facing borrowers that need to refinance their projects, new debt has been sourced for a major mixed-use London scheme. Last week, alternative lender Cheyne Capital announced it has provided a £123 million (€139 million) senior loan to manager MARK to refinance the Borough Yards scheme close to London Bridge station in the UK capital, which launched in spring 2022.
Borough Yards covers a 2.5-acre site and contains, leisure, office and retail space. The loan refinances the existing lender group following practical completion of the scheme, and partial lease-up. Three-quarters of the scheme by lettable area has been leased.
“At Cheyne we are mostly sector agnostic, focusing instead on lending against quality real estate projects and sponsors who have a proven track record and capabilities to deliver on their business plan,” said Filippo Alessandria from Cheyne’s real estate team.
Today’s Term Sheet was prepared by Mark Mwaungulu, with Daniel Cunningham, Evelyn Lee, Lucy Scott and Samantha Rowan contributing
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