Term Sheet: Vonovia’s social bonds, life sciences in the spotlight, the UK’s commercial eviction moratorium ends

German residential owner Vonovia considers the social side of ESG with its latest bond issue; HSBC backs the growth potential in life sciences real estate; the UK’s commercial eviction moratorium comes to an end with potential ramifications for property lenders; and more in today’s briefing, exclusively for our valued subscribers.

They said it

“Real estate is immovable. But the world around it is changing fast. As a long-term investor, you need to adapt because real estate is exposed to so many changes”

Stéphane Villemain, who oversees corporate and social responsibility at Ivanhoé Cambridge, speaking to affiliate title Real Estate Capital USA at this month’s MIPIM conference about why the Montreal-based investment management company is aggressively implementing a global ESG strategy

What’s happening?

Vonovia thinks socially
Green bond issues by European real estate companies have become a more frequent occurrence. Less frequent are issuances of bonds structured in accordance with social impact targets. Last week, German housing giant Vonovia issued its first social bonds in a significant deal for the sector [read the announcement here]. In total, Vonovia issued €2.5 billion of bonds, including green bonds, plus two social bonds with terms of around four and six years.

The social bonds will be used to finance designated ‘social’ projects. This includes housing allocated to holders of state subsidy entitlements, as well as privately financed flats in Berlin to provide access to affordable housing, with rents at least 15 percent below the officially determined average local reference rent.

“The bonds demonstrate our social responsibility and our strategy of sustainability. This is precisely what investors expect from companies today,” said Philip Grosse, CFO of Vonovia. “In turn, we as a company benefit from social bonds and green bonds as an opportunity to expand our investor base.”

GIC’s big logistics loan
Financing European logistics remains a popular activity for real estate lenders. Last week, CoStar News reported that insurer AIG and investment bank Royal Bank of Canada provided a €1.5 billion loan for Singaporean investor GIC’s purchase of a large European logistics portfolio, in a deal that CoStar said reflects a 65 percent loan-to-value. EQT Exeter sold the €3 billion portfolio to GIC in a deal that completed in December 2021 [read more about GIC’s logistics acquisition drive courtesy of affiliate title PERE here].

Demand for European logistics property remains high. A report by BNP Paribas Real Estate this month showed more than €65 billion was invested in industrial and logistics real estate in the region in 2021, with prime yields dropping to 3 percent in certain markets. See the data snapshot below for Knight Frank’s rental growth forecast for the sector in the UK.

Life sciences loan
UK bank HSBC is the latest lender to provide a notable life sciences sector financing. The bank provided a £150 million (€177 million) debt facility to listed company Life Science REIT, which specialises in the sector in the UK. The financing comprised a £75 million, three-year term loan, plus a revolving credit facility, and was the REIT’s first debt facility [read the announcement here]. The facility, which is priced at 225 basis points over SONIA, will fund its acquisition strategy across Oxford, Cambridge and London – known as the UK’s life sciences ‘Golden Triangle’.

The life sciences real estate sector is expanding fast. In a clear signal of its potential, Canary Wharf Group announced this week a joint venture with Kadans Science Partner for 750,000 square feet of wet lab-enabled space in London Docklands, which is due to be Europe’s largest commercial lab building. Affiliate PERE has learned that the joint capital commitment to the project will be approximately £500 million.

And Hibernia makes three
Another week, another privatisation event in the real estate equity market. The spate of real estate investment trusts being taken private or recapitalised via private money continues with Brookfield‘s cash purchase of Hibernia REIT, a Dublin-focused office specialist. The Canadian mega-manager will pay a shade less than €1.1 billion for the portfolio, or €1.63 a share.

While Brookfield’s offer price represents a more than 35 percent premium to the closing price on March 24, the total acquisition cost is a 5.7 percent discount on the overall portfolio value as of the end of last year. The transaction, which is expected to close in late Q2 2022, will be Brookfield’s third European office takeover this year, following the acquisition of German office REIT alstria in January and a public tender offer to buy Belgian office specialist Befimmo SA last month.


End of the line
Last week, the UK government’s moratorium on the eviction of commercial tenants for non-payment of rent came to an end and a new arbitration process passed into law. The moratorium had been introduced to protect businesses during the covid pandemic. But, per a 1 March article by UK property publication EG [see here], adviser Remit Consulting expected there to be £8 billion of unpaid rent by the end of the moratorium.

The impact on real estate lenders is so far unclear. Throughout the pandemic, many have worked with borrowers struggling to service loans due to cashflow issues. Distressed situations have been relatively rare. However, in a March 2021 comment piece [read here], written as the moratorium was extended, one property receiver said there could be cases where lenders resort to enforcement action in situations where sponsors cannot, or will not, cure loan breaches after the end of the moratorium.

Many in the market do not expect a wave of such situations. Plenty of landlords and tenants have resolved their pandemic arrears. But a minority of tenants are understood to have used the moratorium to avoid paying rent, which may have implications for their landlords’ ability to service their debts. Helen Pratten, consultant EY’s UK and Ireland strategy and transactions partner for real estate, hospitality and construction, said a minority of tenants have refused to come to the negotiating table with landlords. “These properties are likely to be at risk after the moratorium ends, particularly since it is unclear how the government’s new rent arbitration process will work in practice,” she said.

Forging ahead
In the US, commercial real estate lenders have not pulled back from lending as the conflict in Ukraine continues to unfold and the Federal Reserve unveils a more aggressive-than-expected plan for interest rates hikes. According to data provider Trepp, 10-year CMBS loans originated prior to February 15 had an average pricing of about 3.6 percent and similar loans funded after that date saw average pricing of around 4.5 percent – a level similar to pricing on loans originated 10 years ago, which are now coming due.

“This is interesting because borrowers with loans coming due were counting on getting pricing of 3.5 percent or 3.75 percent, which would make their DSCR look great. Now that tailwind has been lost and they are rolling in one loan to another with a similar rate,” Manus Clancy, a senior managing director at the data and analytics provider, told Real Estate Capital USA last week. Still, the important takeaway is that lenders continue to be lending. “They’re lending wider to compensate for the next shoe to drop, but they’re in the market,” Clancy adds.

Data snapshot

On an industrial scale
Rental growth in the UK’s industrial and logistics sector is set to continue to outpace both the office and retail sectors over the next five years, according to consultant Knight Frank.

Loan in focus

HIG’s luxury hotels loan
Alternative investment firm HIG Capital believes London’s five-star hotel sector will emerge as a winner out of the pandemic. Last week, the Miami-headquartered firm announced it had provided a £76 million (€90 million) mezzanine loan to Shiva Hotels [read our August 2020 interview with its founder] for a portfolio of luxury London hotels including The Guardsman, located on Buckingham Gate in Westminster, and Middle Eight Covent Garden, which both opened in 2021.

The Middle Eight development was financed in March 2020 with a £62 million loan from Leumi UK, the UK arm of Israel’s Bank Leumi. Chris Zlatarev, principal at HIG Europe Realty Partners, told Real Estate Capital Europe the new loan is a corporate mezzanine financing that has prop-co level security, with the prop-cos having no recourse to senior debt from Leumi and ICG Real Estate. The overall loan-to-value is in the 70 percent range.

“The structure and financial covenants of the senior and the mezzanine financing were designed to allow a full recovery from the pandemic and for the company to achieve its business plan and growth objectives,” Riccardo Dallolio, managing director and Head of HIG Europe Realty, added.

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