Term Sheet: WeWork’s woes, Prelios to change hands, Patrizia’s Frankfurt refinancing

WeWork’s Q2 earnings call provides a concerning update; Italian credit specialist Prelios to be sold; Patrizia sources a major office refinancing in Frankfurt; and more in today's briefing, exclusively for our valued subscribers.

They said it

“Buying great assets with compromised capital structures is always the easiest way to strong returns”

Bruce Flatt, chief executive officer of Canadian investment giant Brookfield Asset Management, speaking on the firm’s Q2 earnings call, as reported by affiliate publication PERE, says now is the best time since 2009 to acquire high quality assets at good value

What’s happening?

Flexible workspace: WeWork, the biggest name in the industry, doubts its ability to continue. (Image: Getty)

WeWork-ing out a problem
When WeWork announced in its Q2 earnings last week that “substantial doubt exists about the company’s ability to continue”, office landlords – while not surprised given the flexible space provider’s financial performance in recent years – would have been concerned. Lenders, which backed many assets in which the company was the tenant, will have shared those concerns. WeWork said it would take action over the next 12 months to reduce rent and tenancy costs and negotiate more favourable lease terms.

This could have sizeable implications for the office sector, but those implications will differ by market. For example, rent is still being paid at Charlemont Exchange, a building in Dublin entirely leased to WeWork. London-based Savills Investment Management purchased the office property in 2019 for €145 million in partnership with Seoul-based Vestas Investment Management, at a yield 70 basis points higher than Ireland’s CBD prime office average at the time.

However, Kiran Patel, Savills IM’s deputy CEO and global CIO, told affiliate title PERE this week that “we were sceptical of WeWork”, owing to its limited profitability. He said there continues to be space for such a provider, but “in hindsight, if we had a similar occupier with the same credentials, paying the same rent, taking the same lease length, but with stronger financials, and that was available to us at the time of leasing, we would have chosen the latter”.

Adding credit
Dublin-headquartered fintech firm ION Group is set to acquire Prelios after US hedge fund manager Davidson Kempner Capital Management agreed to sell the Italian credit specialist, according to Reuters. The purchase price has not been disclosed, although Reuters cited two sources as saying the deal values Prelios at €1.35 billion.

According to the report, a consortium of banks led by UniCredit, Intesa Sanpaolo and BNP Paribas, and including Banco BPM, Standard Chartered Bank and Mediobanca, will finance approximately half of the purchase price. Prelios, through its investment management firm Prelios SGR, manages around €8 billion of assets across various investment funds.  The firm also operates a debt fund called Prelios RED Real Estate Debt, which provides loans and debt securities, backed by collateral with underlying real estate assets.

An ‘anticyclical’ opportunity
The denominator effect, which has led investors to rebalance their portfolios, has hindered real estate capital fundraising for managers. However, Stuttgart-based real estate debt specialist BF.capital, a subsidiary of German financing consultant BF.direkt, believes now is a good time for institutions to allocate to real estate strategies – by taking an “anticyclical” approach and choosing to do so through debt rather than equity.

The firm is looking to launch its second real estate debt fund in the fourth quarter and will look to raise €300 million, with a hard-cap set at €500 million. Manuel Köppel, chief financial officer at BF.capital, said the level of opportunity in the real estate debt space should be considered separately to the equity market – which is subject to negative sentiment due to falling values. Debt, he added, offers favourable returns at lower risk.


Debt despite challenges
The retail property sector was suffering long before the covid-19 pandemic caused further woes for shopping districts. Meanwhile, the pandemic was largely the catalyst for a change in fortunes for offices. But while these two sectors remain challenging, evidence in the past week from the London area suggests select opportunities can make sense to lenders. This week, Aviva Investors, the investment arm of UK insurer Aviva, provided a £200 million (€234 million) facility to UK REIT Shaftesbury Capital secured against a portfolio within its Carnaby estate, which includes retail and office space, as well as residential in London’s West End.

Meanwhile, Investec Real Estate, the UK- and South Africa-headquartered bank, provided a £122 million construction financing to private real estate firm LCN Capital Partners for the development of a 283,000 square foot office building in Kingston Upon Thames, southwest London, which has been pre-let to consumer goods company Unilever. Investec provided £43 million and arranged £79 million from Allied Irish Bank and Bahrain-headquartered Bank ABC, in what it described as the largest office development loan in outer London so far this year.

Data snapshot

Dutch investment slump
So far this year, a stark decline in investment has been seen across European markets due to uncertainty around rising rates. According to consultant Savills, H1 investment figures for the Netherlands were the lowest since 2013, at €3.75 billion, with a notable drop-off in €25 million-plus transactions.

Loan in focus

Commerzbank Tower: a group of banks has refinanced the asset. (Image: Patrizia)

Patrizia’s Frankfurt refinancing
A group of European banks, led by Germany’s BayernLB, has refinanced the Commerzbank office tower in Frankfurt, in a major lending deal for the German market. The refinancing was provided to Augsburg-based investment management firm Patrizia, on behalf of its South Korean client Samsung Asset Management. The consortium, which included pbb Deutsche Pfandbriefbank, LBBW and UniCredit, refinanced the office tower at a 55 percent loan-to-value. The loan amount was not disclosed, although Patrizia acquired the asset in 2016, on behalf of Samsung AM, for a reported €800 million. Philipp Schaper, CEO of European real estate at Patrizia, said the refinancing it received for the iconic tower shows that there is still lender appetite for sustainable offices in Europe.

Today’s Term Sheet was prepared by Mark Mwaungulu, with Daniel Cunningham contributing