The availability, cost and sources of debt underwent a radical transformation in 2013, the implications of which are having a huge impact on the property market. Estates Gazette examines some of this year’s key developments and predicts how they might play out over 2014
2013
2014
Non-performing loan portfolios
>>>>>>>
The European non-performing loan portfolio market really began to hit its stride in 2013. PwC’s bi-annual analysis, published in October, put volumes for the first eight months of the year at €15bn (£12.5bn), up from €13bn in 2012. For the UK, the consultant estimates there were €4bn of CRE NPLs between January and August. But Chris Mutch, PwC’s portfolio advisory group director, says: “There is another €3bn-€4bn that’s likely to be done by the end of this quarter as Lloyds, Nama and Spanish banks have been trying to get a lot out the door before Christmas.” The rising volume reflects the toxicity that remains on balance sheets and demand from buyers of distressed real estate. In the UK Lloyds has strived to reduce its non-core book to below £70bn as it prepares to be returned to private hands.
IBRC’s sale of €22bn of NPLs finally began to arrive in the last quarter of this year. The vast scale of the deleveraging has likely discouraged other banks from NPL sales for the next few months, with projects Rock, Salt and Sand likely to be the only shows in town for the first quarter. But Italian and Portuguese banks are expected to follow, as are German banks. RBS is also expected to start a sell-off in earnest following the creation of its internal bad bank and after dipping its toe in the water with the Sapphire portfolio this year. For Mutch the “avalanche” is starting and will likely persist for the next two years. But there will be another key trend for smaller UK-focused investors. He says: “Those who bought portfolios in 2010 and 2011 will start secondary trading. The fact that the lending markets are coming back as well means there will be more secondary portfolio trades as the larger funds have already made their money.”
Performing loan books
>>>>>>>
Arguably the biggest stories this year involved the sale of performing loan books. Commerzbank Hypothekenbank Frankfurt sold the former Eurohypo UK loan book to US behemoth Wells Fargo for £4bn and GE Capital bought Deutsche Postbank’s UK loan book for £1.4bn. This is of huge significance for the UK market. Eurohypo was one of the most active property lenders of the past decade and the fact that respected operators Max Sinclair and Mike Acratopulo have moved with the book lends credence to Wells Fargo’s claims that it will build on the valued relationships that Eurohypo established. A first deal has been slower to emerge than expected; however, sources say an announcement is imminent.
With German lenders’ UK loan books largely shifted, expect them to focus on continental Europe in their efforts to sell non-core assets. Commerzbank has already appointed Lazard to explore a sale of the €5bn Spanish division of Hypothekenbank Frankfurt, another former Eurohypo book. As with the UK book, there is a 60:40 split between performing and non-performing loans, so expect to see bidders emulating the successful Wells Fargo/Lone Star bid. The fact the bank is even countenancing the sale indicates how far the market has moved. The level of interest in the book will show how much further it has progressed. Expect to see German-owned Dutch loan books also put up for sale.
Debt funds
>>>>>>>
With the rush of investors planning to launch real estate debt platforms abating, it was all about fundraising and deployment this year. For some this meant success: Pramerica reached a total of €2bn across four funds for its European platform, and the Prudential Group’s investment manager M&G Investments also tied up a £1bn capital raise. Others struggled to raise money or make plans stack up as margins dropped. James Caan’s 90 North Real Estate Partners dropped its plans, Cordea Savills’ senior debt team dissolved, and others never appeared. Competition for deals intensified, although bigger outfits such as LaSalle Investment Management, and nimble players including IGC-Longbow, which provided Shiva Hotels with £74.5m to purchase Millennium Bridge House, EC4 (pictured), Cornerstone and DRC Capital found a niche.
Next year, expect more sovereign wealth funds to find their way into the lending market, following Norges Bank Investment Management’s tie-up with AXA Real Estate. CPPIB and others are already looking. Those with long-mooted plans such as Henderson/TIAA-CRE will join the crowd and others including Aviva will see their plans to start lending gather pace, all adding to intense competition for deals. This will continue to drive activity out to the regions and up the risk curve or to alternative sectors or deals – healthcare or short-term bridging loans, anyone? Those unable to deploy cash at the terms agreed with investors will be forced to renegotiate or admit defeat. For those with more success, fundraising will be back on the cards.
Commercial mortgage-backed securities
>>>>>>>
This year marked the peak of boom time for European CMBS maturities, with around £20bn hitting maturity. Some big deals such as Barchester Care Homes, Toys “R” Us and London & Regional’s Lords portfolios were resolved during the year. A freshly liquid market also helped companies such as Bruntwood meet their debt deadlines in good time. As the year wore on the restructuring of delinquent loans gave way to new issuance. More than €6bn of CMBS transactions closed, dominated by German multifamily deals, such as Gagfah’s circa €700m deal, and there was a new focus on structure. Cairn Capital’s Peter Hansell, who advised on the Toys “R” Us refinancing, said this year’s innovative transactions were trying to adapt to new regulation and investors’ requirements.
A resolution for some of the outstanding 2013 maturities can be expected, such as Evans Randall’s £205m debt pile at 25 North Colonnade, E14, and the £300m Fox portfolio. And with €13bn of loans on the maturity watch-list – now excluding More London’s £735.2m loan following an agreement to sell the estate – next year is expected to provide plenty more refinancings and restructurings. UK care home operator NHP will be one of these. Deal structures will continue to evolve as the market for new issuance picks up. A big challenge in 2014, according to Hansell, will be moving investor demand from German multi-family deals into more commercial real estate transactions. The elusive multi-loan conduit CMBS could make an appearance.
The availability, cost and sources of debt underwent a radical transformation in 2013, the implications of which are having a huge impact on the property market. Estates Gazette examines some of this year’s key developments and predicts how they might play out over 2014 2013 2014 Non-performing loan portfolios >>>>>>> The European non-performing loan portfolio market really began to hit its stride in 2013. PwC’s bi-annual analysis, published in October, put volumes for the first eight months of the year at €15bn (£12.5bn), up from €13bn in 2012. For the UK, the consultant estimates there were €4bn of CRE NPLs between January and August. But Chris Mutch, PwC’s portfolio advisory group director, says: “There is another €3bn-€4bn that’s likely to be done by the end of this quarter as Lloyds, Nama and Spanish banks have been trying to get a lot out the door before Christmas.” The rising volume reflects the toxicity that remains on balance sheets and demand from buyers of distressed real estate. In the UK Lloyds has strived to reduce its non-core book to below £70bn as it prepares to be returned to private hands. IBRC’s sale of €22bn of NPLs finally began to arrive in the last quarter of this year. The vast scale of the deleveraging has likely discouraged other banks from NPL sales for the next few months, with projects Rock, Salt and Sand likely to be the only shows in town for the first quarter. But Italian and Portuguese banks are expected to follow, as are German banks. RBS is also expected to start a sell-off in earnest following the creation of its internal bad bank and after dipping its toe in the water with the Sapphire portfolio this year. For Mutch the “avalanche” is starting and will likely persist for the next two years. But there will be another key trend for smaller UK-focused investors. He says: “Those who bought portfolios in 2010 and 2011 will start secondary trading. The fact that the lending markets are coming back as well means there will be more secondary portfolio trades as the larger funds have already made their money.” Performing loan books >>>>>>> Arguably the biggest stories this year involved the sale of performing loan books. Commerzbank Hypothekenbank Frankfurt sold the former Eurohypo UK loan book to US behemoth Wells Fargo for £4bn and GE Capital bought Deutsche Postbank’s UK loan book for £1.4bn. This is of huge significance for the UK market. Eurohypo was one of the most active property lenders of the past decade and the fact that respected operators Max Sinclair and Mike Acratopulo have moved with the book lends credence to Wells Fargo’s claims that it will build on the valued relationships that Eurohypo established. A first deal has been slower to emerge than expected; however, sources say an announcement is imminent. With German lenders’ UK loan books largely shifted, expect them to focus on continental Europe in their efforts to sell non-core assets. Commerzbank has already appointed Lazard to explore a sale of the €5bn Spanish division of Hypothekenbank Frankfurt, another former Eurohypo book. As with the UK book, there is a 60:40 split between performing and non-performing loans, so expect to see bidders emulating the successful Wells Fargo/Lone Star bid. The fact the bank is even countenancing the sale indicates how far the market has moved. The level of interest in the book will show how much further it has progressed. Expect to see German-owned Dutch loan books also put up for sale. Debt funds >>>>>>> With the rush of investors planning to launch real estate debt platforms abating, it was all about fundraising and deployment this year. For some this meant success: Pramerica reached a total of €2bn across four funds for its European platform, and the Prudential Group’s investment manager M&G Investments also tied up a £1bn capital raise. Others struggled to raise money or make plans stack up as margins dropped. James Caan’s 90 North Real Estate Partners dropped its plans, Cordea Savills’ senior debt team dissolved, and others never appeared. Competition for deals intensified, although bigger outfits such as LaSalle Investment Management, and nimble players including IGC-Longbow, which provided Shiva Hotels with £74.5m to purchase Millennium Bridge House, EC4 (pictured), Cornerstone and DRC Capital found a niche. Next year, expect more sovereign wealth funds to find their way into the lending market, following Norges Bank Investment Management’s tie-up with AXA Real Estate. CPPIB and others are already looking. Those with long-mooted plans such as Henderson/TIAA-CRE will join the crowd and others including Aviva will see their plans to start lending gather pace, all adding to intense competition for deals. This will continue to drive activity out to the regions and up the risk curve or to alternative sectors or deals – healthcare or short-term bridging loans, anyone? Those unable to deploy cash at the terms agreed with investors will be forced to renegotiate or admit defeat. For those with more success, fundraising will be back on the cards. Commercial mortgage-backed securities >>>>>>> This year marked the peak of boom time for European CMBS maturities, with around £20bn hitting maturity. Some big deals such as Barchester Care Homes, Toys “R” Us and London & Regional’s Lords portfolios were resolved during the year. A freshly liquid market also helped companies such as Bruntwood meet their debt deadlines in good time. As the year wore on the restructuring of delinquent loans gave way to new issuance. More than €6bn of CMBS transactions closed, dominated by German multifamily deals, such as Gagfah’s circa €700m deal, and there was a new focus on structure. Cairn Capital’s Peter Hansell, who advised on the Toys “R” Us refinancing, said this year’s innovative transactions were trying to adapt to new regulation and investors’ requirements. A resolution for some of the outstanding 2013 maturities can be expected, such as Evans Randall’s £205m debt pile at 25 North Colonnade, E14, and the £300m Fox portfolio. And with €13bn of loans on the maturity watch-list – now excluding More London’s £735.2m loan following an agreement to sell the estate – next year is expected to provide plenty more refinancings and restructurings. UK care home operator NHP will be one of these. Deal structures will continue to evolve as the market for new issuance picks up. A big challenge in 2014, according to Hansell, will be moving investor demand from German multi-family deals into more commercial real estate transactions. The elusive multi-loan conduit CMBS could make an appearance.
