Very few banks have the capacity or will to take on the complex funding arrangements for pan-European property deals. But Eurohypo has proved that it can be done, and smaller banks are stepping in to finance the riskier types of property lending
With the number of multi-jurisdiction deals rising, so is the demand for pan-European property finance. However, investors are finding few banks that can meet their demands. “Many banks claim that they can arrange pan-European finance, but the number of banks who can really put together a pan-European loan is limited,” according to Tony Edgley, chairman of corporate finance at Jones Lang LaSalle.
While many European investors would like to be able to go to a single source for financing, they often find that it is cheaper to approach different banks and finance each property purchase individually.
European banks also often lack the power to put together pan-European financing. The branches of many international organisations are more like little kingdoms, making it difficult for headquarters to arrange a loan across many countries. Those who attempt to do so face high legal costs, as each country has its own laws that need to be considered, making cross-border financing a cumbersome process.
One bank with pan-European experience is Eurohypo. Last year, the German bank arranged a €150m pan-European loan for Pillar retail Europark fund, which allowed Pillar to finance acquisitions directly and indirectly across seven European countries. Under the arrangement, Pillar can buy up property around Europe without having to worry about the financing for each separate deal, as long as the properties meet certain criteria agreed with the bank.
It took Eurohypo nearly a year to sort out the legal complexities for the arrangement, but the investment paid off. Three months after the Pillar financing deal, Eurohypo has just carried out a €185m senior/mezzanine Nordic loan structure for AEWIxis Europe in a sale-and-leaseback deal involving offices occupied by Nordea in Norway, Sweden and Finland. “We had a steep learning curve, but our efforts our now paying off,” says Peter Denton, a director at Eurohypo.
Typically, cross-border financing structures will involve allocating finance across numerous individual special-purpose companies, each of which owns a single asset, and are in turn all owned by a single parent entity. Banks will seek cross collateralisation of all the properties, as this means that if one asset runs into difficulties, it can be financially supported by the other properties.
“The trick to achieving cross collateralisation is to structure a set of inter-group obligations that lead all the companies in the structure to effectively guarantee the position of each other,” says Denton. “Varying legal and tax jurisdictions make this a challenge.”
In this deal, Denton also had to hedge against the risk of dealing with different currencies, although for most of Europe, the introduction of the euro has made transactions across different jurisdictions far more viable.
Although a number of high-profile portfolios sales have collapsed in the past couple of years – notably those in Germany involving retailer Metro and engineering/technology giant Siemens – there are still enough companies that want to sell their property portfolios.
“There are a number of properties up for refinancing or portfolios that are going to be sold,” says Jonathan Pollack, vice-president and head of European CMBS trading at Deutsche Bank. In a recent deal, Deutsche Bank helped refinance a shopping mall in Oberhausen, Germany, by carrying out the country’s first true-sale commercial mortgage-backed securitisation (see panel, page 43).
While some investors are seeking pan-European acquisitions, others say it is hard to find banks that are willing to finance the mezzanine – or highest risk – parts of a loan. Banks are becoming more cautious about their lending as they prepare for the introduction of new banking rules, under Basel II, which will require them to hold greater reserves on their balance sheets (see page 44). In future, they will have to take a more critical look at their lenders.
But where the traditional banking names fear to go, smaller banks see new opportunities, and they have been ever- more innovative in developing property finance instruments. Most want to acquire a whole loan and then attempt to sell slices of it on to other banks – or, in the case of Deutsche Bank, to bond investors.
Banks take on different slices of financing according to the kind of risk profile they are seeking. Germany’s Aareal bank, for example, prefers to hold on to the lion’s share of the senior loan, while Nomura, an investment bank, sells on the senior debt and keeps the riskier mezzanine tranches. Last September, Nomura financed a sale-and-leaseback of seven leisure parks in Europe. It sold €410m of senior debt to a syndicate of banks and kept part of a €60m mezzanine tranche.
For Nomura, mezzanine finance is a more profitable business than equities right now. “In the US, there are many independent mezzanine players,” says David Finkel, an associate of Nomura’s Asset Finance Group. “Europe isn’t in the same position yet, but given the growing demand for the product, it is likely to head that way.”
This must surely be on the mind of one financier, who is trying to interest banks and brokers in a €250m blind mezzanine fund. The financing is costly, as it needs to be recycled constantly.
Property experts are also split over the extent of demand for mezzanine financing in Europe. Despite the higher returns that mezzanine finance offers, the majority of banks are still deterred by the risks. Most banks do not want to finance mezzanine tranches without having some control over the senior debt.
Scottish and Irish banks are among those that have moved in to provide the finance that others are shying away from. Bank of Scotland, for example, set up a branch in Frankfurt, home to more bank branches than almost any other European city, in April last year.
Axel Froese, head of the bank’s European real estate group in Germany, observes that German banks are not keen on mezzanine and equity bridge loans. “We’ve got many customers who have reached their credit ceiling with the traditional banks,” says Froese. He recently financed a €24m mezzanine tranche of a €107m loan. A German mortgage bank took on the senior part of the loan, which was supplied to finance a sale-and-leaseback deal.
Nobody knows how many companies will refinance or sell their property portfolios. In Germany, estimates of the value locked up in the country’s biggest companies range from €20bn to €115bn. But the debate over whether companies should sell their property is charged with emotion; a property portfoilo is often regarded as the family silver.
Especially big corporate disposals have proved difficult to achieve. Often, not all the property in portfolios offered for sale is first class, but managers find it difficult to give a discount in the case of a portfolio sale. Also, when companies do sell and lease back their portfolios, they are not keen on signing long leases, because under the new Basel II rules (which are due to come into force in 2007) long-leases will be regarded as long-term liabilities on a company’s books. However, long leases are exactly what investors want.
Companies are increasingly looking to sell and lease back smaller portfolios, which are more manageable. The fact that quite a few big portfolio sales have been shelved rather than abandoned makes others hopeful that big deals aren’t dead yet. Managers may return to the negotiating table with a more reasonable price – as long as there is no sign of an economic recovery.
The debate may eventually die down as soon as the economy starts to pick up. Companies will then feel less pressure to sell their property and investors may shift their money into equities. As a consequence, pan-European finance may lose some of its importance.
Why size matters
Size is everything in pan-European finance. Because of all the work involved, pan-European deals only become viable if the amount involved is over €50m, experts say. Others put the figure at €100m. Big loans are also easier to slice up so the parts can be syndicated to other banks or investors. As in traditional property financing, banks prefer a good spread of tenants when lending against pan-European property. Large portfolios often meet both the size and tenant-spread criteria and are therefore the most likely targets for pan-European finance.
Different types of banks provide different forms of property financing. German mortgage banks prefer large loans whose terms stay more or less fixed. Conduit lenders acquire existing loans with the purpose of securitising them and selling the bonds to investors. German banks also used to be active in this area, but new names such as Goldman Sachs, Bear Stearns and Morgan Stanley are taking over. Finally, there are high return lenders, looking to finance the loans or slices that nobody else wants to finance. Among them are the Irish and Scottish banks, GMAC and Lehmans.
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Syndicated property loans to European borrowers |
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|
There was a big rise in property financing work last year |
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|
2003 $m |
2002 $m |
Total $m |
|
|
Western Europe |
11,970 |
6,991 |
18,961 |
|
UK |
5,560 |
2,597 |
8,157 |
|
Germany |
3,043 |
661 |
3,704 |
|
France |
1,037 |
1,283 |
2,320 |
|
Spain |
829 |
523 |
1,352 |
|
Netherlands |
480 |
279 |
760 |
|
Italy |
369 |
436 |
805 |
|
Sweden |
356 |
432 |
788 |
|
Norway |
180 |
0 |
180 |
|
Switzerland |
72 |
554 |
626 |
|
Luxembourg |
44 |
0 |
44 |
|
Belgium |
0 |
199 |
199 |
|
Liechtenstein |
0 |
27 |
27 |
|
Eastern Europe |
827 |
76 |
903 |
|
Poland |
777 |
76 |
853 |
|
Russia |
45 |
0 |
45 |
|
Serbia & |
6 |
9 |
5.7 |
|
Montenegro |
|||
|
Total |
12,797 |
7,067 |
19,865 |
|
Source: Dealogic |
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|
Arranger rankings for syndicated property loans* |
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|
Eurohypo’s loan facility for Pillar broke new ground in 2003 |
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|
2003 ranking/name |
$m |
Share % |
|
|
1. Eurohypo |
4,569 |
35.71 |
|
|
2. Royal Bank of Scotland |
2,706 |
21.15 |
|
|
3. Nationwide Building Society |
737 |
5.76 |
|
|
4. Bayern LB |
720 |
5.62 |
|
|
4. West LB |
720 |
5.62 |
|
|
6. Bank of Scotland |
604 |
4.72 |
|
|
7. Credit Agricole – Credit |
420 |
3.28 |
|
|
Lyonnais |
|||
|
8. SG |
419 |
3.27 |
|
|
9. HSBC |
367 |
2.86 |
|
|
10. Aareal Bank Group |
362 |
2.83 |
|
|
11. ING |
197 |
1.54 |
|
|
11. NIB Capital Bank |
197 |
1.54 |
|
|
13. BNP Paribas |
192 |
1.51 |
|
|
14. Den norske Bank |
180 |
1.41 |
|
|
15. Bilbao Bizkaia Kutxa |
171 |
1.33 |
|
|
16. Skandinaviska Enskilda |
110 |
0.86 |
|
|
Banken |
|||
|
17. HVB Group |
76 |
0.60 |
|
|
18. Raiffeisen Zentralbank |
45 |
0.35 |
|
|
Oesterreich |
|||
|
19. European Bank for |
5.70 |
0.04 |
|
|
Reconstruction & Development |
|||
|
Total |
12,797 |
100 |
|
|
Source: Dealogic |
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|
Notes: Figures have been rounded. *Table compiled from data for 2003 provided by European banks; US-listed banks such as Citigroup are not included. |
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