They said it

“While the UK now looks extremely cheap for a dollar investor, it’s also materially more risky with three-year gilts at 4.7 percent as we speak”

Charles Baigler, head of acquisitions for real estate at Geneva-based manager Pictet Alternative Advisors, stressed to affiliate title PERE the importance of getting comfortable with the UK economy over buying on its weak currency.

What’s happening

UK uncertainty impacts lenders
Although the UK government performed a U-turn on Monday on the most contentious part of its 23 September budget, rowing back on plans to cut the top rate of income tax, there remains huge uncertainty within markets about the credibility of the Liz Truss government’s economic policies. At the time of writing, the pound had recovered from a recent record fall but remained at low levels versus other currencies, while the 10-year gilt yield had dropped below 4 percent. But many believe the UK’s economic woes are far from over.

Speaking to UK-based real estate debt specialists in the past week, it is clear the dramatic collapse of the pound and subsequent expectations of rate rises have impacted property lending [read coverage here]. Some described a pause as lenders wait to see what happens in the capital markets. And while some argue there are debt providers still aiming to do business, they agree the UK financial turmoil has made underwriting transactions very challenging.

Forced sales warning
Last week, one key market observer warned of the prospect of forced sales. In a statement following news that lenders were withdrawing residential mortgage deals amid interest rate uncertainty, Nicole Lux, senior research fellow at London’s Bayes Business School and lead author of its bi-annual UK commercial real estate lending report, said lenders face difficulty assessing the risk of falling property values and payment difficulties of borrowers.

Lux said residential and commercial mortgage providers have been busy running stress tests to consider additional capital required to cover risks on their lending books. The five-year SONIA swap rate shows debt affordability is already in sharp decline, she said. “All this will inevitably lead to forced sales amongst commercial and residential property owners, which will play strongly into the hands of capital rich investors who can pick up a bargain,” she added.

EXPO Real 2022

Refinancing risk high on the agenda in Munich
EXPO Real 2022 is happening in Munich, and Real Estate Capital Europe is there. Here are five things debt specialists at the event are talking about.

1. Refinancing risk is heightened. The big question for lenders is: are current valuations truly reflective, or are they based on outdated metrics? Debt yield is also seen to be of paramount importance to evaluating refinancing risk. As one lender said: “Backward-looking metrics are not helpful in today’s market.”
2. ‘Uncertainty’ is the word of the week. Some say the market is paused rather than closed as participants wait for clarity on interest rates. One adviser said lending activity has dropped off considerably. Clearing banks are most risk-averse, with some not expected to come back to the market in earnest until at least January 2023.
3. Borrowers are under pressure. Delegates report that some sponsors are considering whether more expensive debt is worth taking on, given its impact on returns. This is affecting the investment market, with buyers arguing for discounted prices on the back of fast-rising credit costs. There are those in the market operating on the basis of “new maths and those working on the basis of old maths”, said one delegate.
4. There is a short-term lending trend. Lenders are agreeing to one- or two-year loan extensions to tide sponsors over, sources say. For lenders, this is an opportunity to do business at a higher margin and keep relationship customers onside.
5. Development loans are difficult to secure. Rising rates, build cost inflation and supply issues have constrained the flow of development finance. Some believe it is a positive. Rental growth, many say, is the only way out of the pressures created by rising interest rates. The hope is reduced supply of new buildings might help push rents up.

Trending

Mezzanine in demand
In a report on the German subordinated real estate debt market, published last week, Berlin-based FAP Group said mezzanine providers are fielding a growing volume of loan requests. A major driver, the adviser said, is increasing caution in the German banking sector. It went on to say mezzanine debt provided by alternative lenders is becoming a key determining factor in the viability of development projects and acquisitions. In total, FAP identified 159 non-bank providers of subordinated debt in the German market, up from 155 when it last conducted the survey. FAP reported interest rates in a range of 7 to 15 percent, but said respondents were considering increases when the survey was conducted between March and June, and those increases would likely be visible if the survey were repeated today.

Laying low
In the US market, New York-based data and analytics provider MSCI has highlighted a shift towards lower leverage as it tracks a drop in the number of loans with a loan-to-value ratio of 80 percent. Loans with leverage of 80 percent or less accounted for 11.9 percent of all originations in first half of 2022, a drop from the 16.6 percent recorded during the same period in 2021. The report also found average LTVs of 57 percent for first mortgages on commercial loans for the three months ending in July, with average LTV of 58 percent for apartment properties during the same period. These figures stood at 58 percent for commercial loans and 63 percent for apartment loans across the first three months of 2022, just as interest rates began spiking. Read more about the report courtesy of affiliate title Real Estate Capital USA here.

Europe’s Top 50 Lenders 2022

Last chance to make a submission!
The deadline for submissions for the 2022 edition of our list of Europe’s top real estate lenders is midday, UK time, Friday 7 October. To make a submission, please fill in the dedicated form, which you can find HERE.

Europe’s Top 50 Lenders 2022 will be published in our winter edition and online on 1 December. For our editorial team to make the right selections for the list, we need you to provide information about your activities since 1 December 2021, when the list was last published (see the 2021 iteration here). The more key information we have at our fingertips, the more likely we are to be convinced your firm deserves a spot in the list. Over to you…

PEI Group is running for Shelter!

An appeal: a team from PEI Group – Real Estate Capital Europe’s publisher – is tackling London’s Royal Parks Half Marathon on 9 October to raise money for Shelter, the UK homelessness charity.

Shelter helps millions of people every year struggling with bad housing or homelessness, campaigning to prevent it in the first place. In 2021, it helped more than 10,000 people and households in London alone through their helpline and face-to-face services.

Any donation to this cause, big or small, will make a difference as we head into a winter of rising energy prices and soaring inflation. PEI will put in 50p for every £1 the runners raise, up to a maximum of £6,000 from the business.

Please visit our page to read more and donate!

Data snapshot

Past its peak?
Attendees of affiliate title PERE’s second virtual Global Passport event last week were divided on whether the logistics real estate market has peaked, per a poll conducted during the event [read more here].

Loan in focus

Quintain nets Wembley loan
UK property company Quintain last week announced it had secured a £277 million (€314 million) financing deal with US bank JPMorgan to fund the next stage of its Wembley Park residential masterplan, close to London’s Wembley Stadium. The loan, Quintain’s largest development financing to date, funds the construction of two buildings at a site called North East Lands. The two buildings will contain 769 apartments, of which nearly three-quarters will be build-to-rent. The remaining quarter will be a mix of shared ownership, affordable rent and discount market rent homes.

Rahul Sule, co-head of JPMorgan EMEA and APAC real estate finance, said the deal, against a backdrop of heightened market volatility and inflationary trends, highlights the bank’s “commitment and capabilities” in the European construction finance sector. Quintain chief executive James Saunders added the deal with JPMorgan is “yet another sign of the financing market’s confidence in Quintain and our product in a time of economic uncertainty elsewhere in the market”.

Today’s Term Sheet was prepared by Daniel Cunningham, with contributions from Lucy Scott and Samantha Rowan