Commerz Real, a subsidiary of German banking group Commerzbank, manages around €34 billion of real estate and infrastructure assets for clients. Barkha Mehmedagic, executive director, head of asset financing and treasury, is responsible for managing around €8 billion of borrowings, as well as treasury functions for its investment vehicles. Real Estate Capital caught up with her in April to discuss the impact of covid-19 on Europe’s real estate debt market.
What role does debt play for your business?
We use debt to support a range of strategies, including our retail fund, institutional funds and our corporate leaseback business. It ranges from plain-vanilla mortgages to structured participation loans. We use it with clients’ equity to purchase real assets, and also use leverage to gear yields and as a natural hedge when investing outside the eurozone.
The maximum loan-to-value we use depends on the fund structure. Open-end funds are highly regulated, so limited to 30 percent LTV at portfolio level. On single assets we can go higher. However, most of our debt sits between 40 percent and a maximum 70 percent LTV. Around 70 percent of our borrowing is asset-specific, but for funds with granular assets we sometimes source fund-level finance from a club of lenders.
Where do you source finance?
Usually banks. We have an established refinancing matrix and awareness of what assets lenders favour. Long-term relationships are important. I’ve been doing this since 2006, so there are banks that have worked with us in difficult times. On the infrastructure side where hold periods are up to 25 years, we have arranged finance from institutional lenders with long-term capital.
How is covid-19 affecting debt liquidity?
Early feedback from banks is they need to absorb the shock of covid-19, but they are sticking with deals already underway. However, lenders are reluctant to consider new financing. There is some pricing revision, but banks are insisting they will be there for their existing clients. Some foreign banks are prioritising domestic clients. Decision-making is also taking longer, because people aren’t at their desks. Hence, the assessment of a deal takes longer.
So far, I don’t see this as a risk. We approached our banks to reassure them about our position. We have said where our developments might run over by a couple of months, for example, but we have kept our lenders informed about our tenants’ and investors’ commitments. Communication is key.
Will lenders be more cautious?
That always happens after a crisis. Most banks we talk to have done a lot of homework since the last crisis and have stuck to the type of business they are most comfortable with. However, there will be stress in loans to some asset classes. I don’t expect an absolute stop from organisations on the lending side but checks and balances will have more emphasis now.
“The first thing I’ve learned [from the crisis] is how to lead a team from a distance”
The market always tends to deliver finance for most assets, but borrowers need to pay more for it in some cases. Some lenders will become troubleshooters, especially in cases where new finance is needed. We are seeing some non-bank lenders increasing activity. In a crisis, there are always some who benefit. This could be an opportunity for non-bank lenders with appetites for higher risk to win more business.
Do you expect your borrowings to come under pressure?
We are closely observing our portfolio and don’t currently see any instances where we need to speak to our banks about covenant breaches. Ultimately, it depends on how long this situation lasts. We analyse our LTVs and other financial covenants on a regular basis. We have a good IT system to monitor them, so we don’t suddenly need to start reading all our loan documentation.
Are even lower interest rates a benefit to you?
On the asset financing side, it’s a positive. We have used low rates to source long-term finance on strategic assets. On the treasury side, we collect equity from investors who want to generate yield. We ask them to put the money in only when we are close to acquiring an asset, or else we would be paying to deposit capital due to negative interest rates.
How will this crisis change the way you work?
The first thing I’ve learned is how to lead a team from a distance. In our Wiesbaden headquarters we’d usually have face-to-face meetings; now we are speaking virtually. It’s the same with our lenders. But such situations bring people together. In the coming months, we will look in more detail at our contracts, with a focus on covenants. We try to do that anyway, so we work with standard documentation. We will also focus even more on sustainable business in those asset classes that are more shock-resistant.
The crisis will help companies with an open mindset on digitalisation become even more competitive. We established a digital strategy in 2018 with the aim of becoming the first digital asset manager. We implemented remote working as soon as we could, and that will represent an advantage in future. Having the ability to adapt like that gives you a view on how to run an investment business in a sustainable way.