The benefits of going solo and then syndicating

German banks’ ability to underwrite mega-loans shows their confidence in the originate-to-distribute model when the right deals come to market.

Sourcing mega-deals for the syndication market is not exclusive to investment banks – German lenders have proved their appetite and capability for the task.

It is only early February and the German real estate finance market has already seen two mega-deals hitting the syndication desks of local banks. Berlin Hyp has underwritten €1.15 billion for a residential portfolio of German housing provider Berlinovo. Meanwhile, LBBW has provided a €1.1 billion long-term financing to Brookfield Properties for a revamp of Berlin’s Potsdamer Platz.

While Berlin Hyp’s deal has been syndicated to Berliner Sparkasse and Berlin’s Investitionsbank, with the three banks taking a €384 million slice each, LBBW’s deal is the “perfect example” of a loan that will find takers in the syndication market, market sources say.

Both Berlin Hyp and LBBW have demonstrated risk appetite to underwrite large tickets, but they have also decided to distribute loans backing assets that offer reassuring criteria for syndicating partners. In the case of Berlin Hyp, the granularity of the portfolio, with 133 properties throughout Germany, offering a total of 17 million square feet of rental space, is understood to provide stable income. In addition, having a state-owned German housing provider as sponsor, managing the portfolio with a long-term view, will offer lenders comfort.

In LBBW’s deal, prospective syndication partners will surely favour a core location such as the iconic Potsdamer Platz in Berlin, with a diversity of tenants and asset types across the quarter’s 17 buildings, 10 streets and two squares. The track-record of Brookfield, having achieved over 90 percent occupancy rate across the portfolio since it was acquired, is equally encouraging.

One of the main drivers for loan syndications is sharing underwriting risk, which real estate lenders should consider, particularly amid the advanced property cycle and despite the pressure to grow their balance sheets. Lenders seem to be already increasing their efforts to distribute risk – in 2018, Europe’s real estate loan syndication was up by 12.3 percent to €45.6 billion, according to data provider Dealogic.

Banks can also benefit from syndication by creating partnerships with non-bank lenders, instead of being in competition with them. As one German banker noted, syndication is not just about sharing risk, but also about reciprocity – I give you a participation in one of my deals and another day I expect participation in one of your deals.

Property investment volumes for Germany have increased to significant levels over the past four years, reaching €77 billion in 2018, up 5.9 percent, according to property services giant CBRE. Despite a bullish market, lenders face fierce competition to source the best deals. In such a scenario, the ability to underwrite large tickets is an obvious competitive advantage.

The risk for syndication, however, is to distribute in a market where margins are under pressure. Germany has seen loan pricing dropping in recent years, with net margins down to an average 104 basis points, from 134bps in 2013, according to the German Debt Report, a survey by the University of Regensburg. At the same time, with German lenders facing ‘micro-margins’ ranging from 50bps to 70bps on core, conservatively leveraged loans – below 60 percent loan-to-value – it seems difficult to see loan pricing falling further.

There are challenges, but the ability to go solo in big deals and to then distribute risk is an advantage for lenders. Those lenders, however, should not forget that only assets with stable income and low risk profile will attract a suitable suite of syndication partners.

Email the author: alicia.v@peimedia.com

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