Although brokers have long been part of the fabric of the US commercial real estate finance market, the idea of European property owners paying intermediaries to handle their debt requirements is relatively new.
Since the global financial crisis and the subsequent growth and diversification of Europe’s property lending industry, a range of advisors have emerged to pair those with capital and those in need of it.
Some borrowers admit it has taken time to come round to the idea of using them. “If you had asked me two years ago whether I would use a debt advisor, I would have answered ‘no way, I am capable of doing it myself’,” says Hugh Fraser, head of capital markets at M7 Real Estate, which invests in regional, multi-let real estate across Europe. “Today, I would respond 100 percent ‘yes’ to that question. I would, and have, used debt advisors on several occasions.”
Europe’s debt advisors range from divisions of large consultancies to boutique, independent firms. Although big-ticket mandates do go through advisors, sources say intermediaries are most active in the sub-€50 million loan market, with its multitude of lenders and borrowers. The sub-€10 million market is also highly brokered, with lenders reliant on business from third parties.
Borrowers say advisor use has grown because of the emergence of Europe’s non-bank lending industry.
“Sponsors need to keep up to date with the lending appetites of dozens of funds,” says Alex Hamilton, chief financial officer at Cervidae, a London-based investment and development business. “They need to know who has raised capital recently, and their lending criteria. This is particularly the case in sectors and geographies where debt funds are more active than banks, or in the more fragmented mid-market or for cross-border transactions.”
Alex Price, chief executive of the UK arm of property investor Fiera Real Estate, says his company has used advisors to support its business plans for overseas clients, as well as in development projects. “On more complex loans, the access to a wider market that an advisor can bring is often invaluable,” he explains. “Only property owners with the scale to have an in-house dedicated debt capability are able to map the debt market sufficiently to access the right debt partner for each deal.”
Europe’s largest property companies have internal treasury departments, but many rely on their finance directors to handle borrowings. For those without significant in-house personnel, advisors’ relationships in the lending industry, the speed with which they can source finance and the cost savings they create by handling deal execution are prized.
Another overlooked benefit, adds Hamilton, is maintaining good borrower and lender relations in tense negotiations. “By using an advisor, you can shift the blame in negotiations,” he says. “A borrower can preserve their relationship with a lender by sending an intermediary to argue that competitors are offering five basis points cheaper, for instance.”
The flipside, he says, is that a badly handled mandate could sully relationships: “Integrity is essential. An advisor which misrepresents either the sponsor or the lender’s position can harm relationships and jeopardise deals.”
Non-bank lenders also told Real Estate Capital that the access to deals which advisors provide is a benefit to their businesses. “In general, they are a positive thing for the market,” says Jim Blakemore, global head of credit investing at BentallGreenOak, the property management business of Canadian insurer Sun Life Financial.
“Our business is about dealflow and relationships, so advisors can be helpful, especially in times like these.”
In the US, lender-advisor relationships are essential, adds Blakemore. He says the same is becoming true in Europe: “Advisors are probably involved in around a third of what we do, so you almost need to treat them as clients.”
David Arzi, chief executive of mid-market lender Starz Real Estate, says around 70 percent of his firm’s business comes through advisors representing borrower mandates. “As a lender, you are unlikely to do 10 deals with the same borrower, but you can do multiple deals with a good advisor. They save a lot of time on the lender side, and they know your product.”
UK specialist lender Octopus Real Estate is active across residential, commercial and development lending. Head of commercial property, Ludo Mackenzie, says 70 percent of deals are introduced by advisors. “The lending market for both commercial and residential relies on a large network of debt advisors,” he says. “A good broker will know which lenders can deliver for them and their clients.”
There are mixed opinions on whether advisors stand a better chance than sponsors of persuading a lender to provide cheaper pricing or more sponsor-friendly terms. Price explains: “It’s hard to be scientific, but experience over the years is that, while debt advisors will seldom reduce the pricing a bank will offer, they may help you find a bank that offers better terms than you would have found from your own resources.”
M7’s Fraser agrees: “Because they have a broader contact base, [advisors] probably end up with slightly better pricing, but not materially.”
“It depends on the relative strength of the borrower,” says Hamilton. “Established sponsors typically command sufficient interest to drive competitive tension between lenders and achieve ‘on market’ pricing. However, less established sponsors, when acting alone, may not be a large enough proposition to drive best-value from lenders. A debt advisor offers the scale of opportunity which will entice lenders to drop pricing.”
Lenders also have mixed opinions on whether advisors drive cheaper pricing. “If [a borrower] has a few lender relationships, it should know where debt is priced and should be able to get the same result as if it hired an advisor,” says Blakemore.
Arzi says advisors’ role is more about certainty of execution than cheaper debt: “I’d think they generate some level of cost savings for sponsors and make the process more efficient.”
Octopus’s Mackenzie acknowledges advisors can achieve favourable loan terms, but he adds: “A broker also guides a borrower to the lender that will perform for them, so pricing and terms are not the only relevant criteria. We will always try and give a borrower or broker the best terms possible, but a good broker will help communicate the deal and help us to shape the terms to best suit the borrower.”
Sources agree the market uncertainty from covid-19 provides advisors with a fresh opportunity in keeping Europe’s real estate debt market functioning.
“The debt market is fairly opaque at the best of times, so borrowers need debt advisors to guide them to the most suitable lender,” says Mackenzie. “With fewer active lenders in the market because of covid-19, debt advisors’ services will be needed even more than usual.”
The economic fallout is expected to lead to distress in real estate loans and create the need for finance for properties with unstable income. As transactions get trickier, some expect advisors’ services to become more attractive.
“In a turbulent market, access to knowledge is at a premium,” says Price, “and that is something advisors bring to clients.”
What good advisors provide
(according to borrowers and lenders)
Reach A broad range of lender contacts
Knowledge Familiarity with lenders’ strategies
and knowing who has capital
Speed Advisors can reduce financing timeframes
Efficiency Sponsors can outsource deal execution