Although real estate financing activity has dipped since the onset of covid-19 in Europe, debt advisors insist clients have continued to turn to them, seeking help amid the uncertainty.
Omega Poole, real estate finance partner at law firm Mishcon de Reya, says: “It is precisely when lenders’ own financing parameters are changing and they may become unable to support clients in the way they would like that debt advisors can bring most value in helping their clients find capital solutions.”
Poole, who provides debt advisory services to the firm’s real estate clients, alongside more traditional legal advice, adds that, as more loans come up for refinancing or covenants come under stress, advisors can support sponsors to “re-stabilise” their assets.
Lockdown restrictions made advisors’ jobs harder, preventing them from meeting clients in person or visiting assets. But Richard Fine, partner at London-based advisory Brotherton Real Estate, says most financing deals remained on course, with only two of his firm’s 12 credit-approved transactions put on ice at the start of the pandemic.
“When the lending landscape is tougher, our services become more needed although it’s definitely harder work,” says Fine. “The only difference now is that there are fewer face-to-face meetings, but we’re still speaking to 40-70 lenders a week.”
Simon Scholl, director at Frankfurt-based property fund manager Corestate Capital Debt Advisory, says video conferencing proved effective with existing clients but more difficult for new business. “If you have known a customer for a while, then technology is a good way to keep the dialogue going,” he says. “But acquiring new customers has become more challenging.” Corestate’s use of technology included a 3D camera system to allow prospective lenders to conduct site visits online.
When it comes to helping borrowers identify sources of capital in volatile conditions, advisors are the first to admit debt is scarcer and more expensive.
“UK clearing banks are still not active at all and I think it will be a while until they come back into the market,” says Fine. “That is a big chunk of your standard, fairly vanilla senior debt product that is just not there, so finding cheap senior debt is proving very tough.”
Alexander Fischbaum, managing director at AF Advisory, a London-based firm that operates across Europe, stresses advisors’ initial approach to lenders is crucial in today’s climate. “Approaching the right lender with well-prepared documents and being able to convince the lender of the merits of the deal nowadays makes or breaks the loan application,” he explains. “We are not talking a few basis points here but quite simply the answer being ‘yes’ or ‘no’ in a world where there are fewer fall-back options.”
Jonathan Jay, partner at independent advisory firm Conduit Real Estate, says there remains a gap in pricing expectations, with vendors insisting on no more than a 5-10 percent discount to pre-covid pricing, but buyers demanding a minimum 20 percent. “When an exogenous event happens, like the initial onset of covid, pricing discovery becomes difficult – and this is where a debt advisor becomes instrumental,” says Jay.
Andrew Wheldon, managing director and head of UK and Ireland at German advisory firm Laurus Property Partners, says the best way to achieve accurate pricing is to get real-time lender feedback from advisors’ own live deals in the market. “In certain asset classes, increased margins have been offset by the significant falls in swap rates resulting in flat or lower all-in rates,” he adds.
Scholl says he tracks lenders’ “sweet spots” when it comes to their credit appetite through regular dialogue: “We establish a fair pricing by comparing pre- and post-covid levels, while considering increased liquidity spreads and also accepting a ‘corona/uncertainty’ premium, especially for more complex or risky transactions.”
With regard to their own cost, most advisors speaking to Real Estate Capital claim their fees have remained the same through the crisis.
“Our fee structures have not been affected by covid,” says Adam Buchler, co-founder of London-based independent advisory firm BBS Capital. “Net of our fees, the borrower should always be in a better position than if they had run the process themselves.”
Dealing with lenders
Debt advisors, particularly those based in the UK, reveal that much of their work during lockdown involved refinancing and development financing requests. However, some have also been drafted in to help untangle borrowers’ issues with existing loans.
Buchler says BBS has spent time working with existing clients and helping them manage conversations with lenders, most of which he says have been flexible and cooperative. Covenant waivers or capital repayment holidays have been necessary in cases but not to the extent seen in the global financial crisis of 2007-08, he says.
“Post-GFC, when leverage was much higher, we ended up spending an enormous amount of time working with both borrowers and lenders on the restructuring and capitalising of loans,” Buchler explains.
But although, this time around, lenders have taken a more accommodating stance, they may not be as forgiving in the next two quarters.
“Lenders won’t be able to just plaster over any serious cracks, such as large-scale tenant defaults,” Buchler says. “This may open up more of a role for us on the restructuring side.”
Wheldon says he has not seen any covid-related distressed market transactions, as lenders are working as hard as they can to support borrowers. This, however, will not last, particularly in sectors with wider structural issues.
“The opportunity will arise for debt advisors to provide recapitalisation and restructuring advice to distressed borrowers,” Wheldon adds.
Brotherton’s Fine expects to see more “hefty” restructuring over the next six months. “As we approach the next quarter date, lenders will start to ask themselves: ‘Is this a viable asset and sponsor? Is this something I can see a recovery on?’”
However, he does not anticipate getting mandated by banks to be a restructuring advisor.
“We might get mandated to sell positions for them that otherwise they might not have sold,” he says. “But we are generally a borrower-focused business.”
Damien Giguet, founder and chief executive at Paris-based Shift Capital, anticipates “big restructuring issues” but not until next year, due to the current buffer of the French state’s 90 percent loan guarantee.
“France-based investors have been managing their borrowings by themselves with a limited number of ‘relationship’ lenders,” he says. “The shrinking of debt offering plus downgrading financing conditions may push some of them to seek an advisor to minimise execution risk and maximise the financing value.”
Debt advisory is a more consultative engagement now than it was six months ago when it was more transactional, according to Jay.
“The role of a debt advisor is probably more important than it was pre-covid, and I think it will become even more critical in its aftermath,” he says. “It is about how to structure the appropriate debt solution and how to make it more palatable and compelling from a lender’s perspective.
“We realise we’re just one cog in the machine but we’re also grist for the mill.”