Throughout 2019, Real Estate Capital has published several long-form features providing in-depth analysis about key trends or features of the real estate debt market. We have explored a mix of topics, including what property lenders think of SoftBank’s rescue of WeWork; how lenders are reacting to retail covenant breaches; why lenders are increasingly keen to lend against alternative asset classes; the evolution of the UK’s ‘challenger’ lenders; and what is next for retail property finance.
Here’s a summary of our in-depth reporting in 2019, in case you missed it:
Will lenders keep faith with a refuelled WeWork? Ever since the New York-headquartered poster child of co-working brought its breakneck expansion to Europe in 2014, its landlords have been able to count on sourcing finance. Indeed, for those lending against office properties, WeWork became a difficult tenant to avoid. Data published in Q1 2019 by consultancy Colliers International showed the company had absorbed around 6.5 million square feet (603,865 square metres) across Europe within four years. However, for a time, it looked as though the WeWork bubble might burst. The company had been dogged by questions over whether its business model – taking long-term leases and sub-letting on a short-term basis – could survive a recession. Many deemed its January 2019 valuation at $47 billion to be massively overinflated. The worst fears about the valuation became real in September when an IPO was planned and postponed. A lifeline, however, came on 22 October in the form of a $9.5 billion refinancing by its largest investor, Japanese firm SoftBank. In this feature, Daniel Cunningham and Rhiannon Curry examine whether the company’s rescue by SoftBank will alleviate concerns caused by its recent troubles.
A wake-up call from retail covenant breaches. For the first time since the global financial crisis, many commercial real estate lenders in Europe are facing the prospect of borrowers tripping their loan covenants. Most of the property loans originated after the financial crisis continue to perform comfortably within their agreed terms. But the spate of retail closures in the past two years has led to a fall in shopping centre values, triggering alarm bells within loan structures. This has particularly been the case in the UK. A common sentiment heard is that lenders are typically adopting a co-operative approach with borrowers when covenant breaches occur. Although many lenders do not want the keys to assets they have financed, some debt providers have taken ownership of retail properties following breaches. In this feature, Daniel Cunningham looks at how retail lenders are reacting to covenant breaches.
Lenders learn to love alternative real estate. Institutional investors have recognised the need to diversify property portfolios outside the traditional core segments – offices, industrial and retail – to include alternative assets, which are often operational by nature. Low yields in traditional asset classes have encouraged some to look elsewhere for higher returns. The lack of available product in the core space across Europe has also been a driving factor in the search of alternative properties. Portfolio diversification is an additional motivating factor for investors at this late stage of the real estate cycle, as several emerging non-mainstream asset classes are perceived to have countercyclical benefits. As investors have warmed to alternatives, lenders have gradually followed. In this feature, Alicia Villegas examines how debt providers are increasingly willing to provide finance in this space.
Rise of the challenger lenders. The UK’s emergent property debt providers, including challenger banks, peer-to-peer platforms and specialist lenders, are raising their profiles and their ambitions. Some challenger bankers say they target niches that larger banks have pulled back from, rather than compete with them directly for deals. However, while they generate much of their real estate financing business from the sub-£15 million loan market, some have grown their lending capabilities. As well as challenger banks, a multitude of niche, non-bank specialist lenders are aiming to win business from an array of UK real estate borrowers. Depending on the cost of their capital, they target distinct parts of the market. Similarly, as the financial backing behind these firms has grown, so has their bandwidth to lend to a broader field. In this feature, Daniel Cunningham finds out how a new breed of real estate lender is challenging old norms.
Will debt for retail real estate dry up? Retail is challenging in the UK at the moment. Meanwhile, across Europe, growing online penetration is likely to reshape the retail landscape. As retail property values fall, debt providers are forced to consider the health of their loans to shopping properties – as well as their long-term exposure to the sector. The immediate challenge for lenders is ascertaining how much the collateral to their retail loans is worth. Another dilemma for lenders is whether to take enforcement action if loan-to-value covenants are tripped in their facilities. In this feature, Alicia Villegas explores whether debt for retail real estate will dry up due to these challenges.