Crosstree and Bloom secure £29m loan for industrial estate repositioning
West London asset is first in duo’s new venture
What Birchwood has provided Crosstree and Bloom with a £29m loan
Why To finance the acquisition and repositioning of Fairview Business Centre
What next A comprehensive refurbishment will be undertaken to modernise and upgrade its EPC rating from D to A+
Birchwood Real Estate Capital has provided a £29m loan to finance the acquisition and repositioning of Fairview Business Centre in Hayes by Crosstree and Bloom, Green Street News can reveal.
The quantum of the finance held against the asset, which was bought for £30m for A2 Dominion Group, represents 55% of its projected stabilised value. The loan from the WR Berkley-backed financier includes a substantial capex tranche, with Bloom and Crosstree aiming to carry out a comprehensive refurbishment of the estate and improve its EPC rating from D to a targeted A+ rating.
Lorna Brown, founder of Birchwood, said: “We are delighted to have supported Bloom and Crosstree on the financing of the first acquisition of their urban logistics JV and to have provided capex facilities which will enable the repositioning of Fairview Business Centre to deliver high-quality modern warehouses in key London locations. It has been a pleasure to collaborate again with BBS in delivering thoughtful financing solutions for high quality sponsors.”
Adam Buchler, managing director of BBS Capital, which advised the borrower, added: “In the current market with transaction volumes lower than usual, the debt markets are extremely competitive for strong projects like this with a high calibre sponsor, well located real estate and robust business plan. Birchwood were selected not only for their competitive commercial terms but also for their flexibility and speed of execution.”
Asif Aziz’s Criterion secures £25m facility for Zedwell hotel expansion
Loan was provided by specialist lender Cynergy Bank
What Criterion Capital has secured a £25m investment facility from specialist lender Cynergy Bank
Why Funding intended to boost the Zedwell brand’s UK-wide expansion
What next Zedwell is set to expand its portfolio to 8,000 rooms by 2027
Criterion Capital, the property firm controlled by billionaire Asif Aziz, has secured a £25m investment facility from FSCS-registered specialist lender Cynergy Bank for the expansion of its Zedwell hotels portfolio.
With three central London locations already, Criterion said the facility will help the brand’s growth across city sites in the UK.
Upcoming Zedwell hotels will soon debut in cities including in York, Manchester and Edinburgh.
In August the property firm, which was advised by BBS Capital, also secured a three-year £25m loan from the Bank of London and the Middle East (BLME). The funding was intended for the conversion offices on London’s Trafalgar Square into a Zedwell hotel.
Criterion launched its first Zedwell property in London’s Piccadilly in 2020 after almost eight years of delay. The second hotel under the brand opened in Tottenham Court Road later that year, as the capital’s first underground hotel.
Zedwell offers rooms named “cocoons”, which features soundproof walls, floors and doors, hypnos mattresses, purified air and warm ambient lighting.
With 13 new sites in development, Zedwell is set to expand its portfolio to 8,000 rooms by 2027.
Omar Aziz, director at Criterion Capital, said: “This £25m equity release is pivotal in accelerating the Zedwell brand’s UK-wide expansion. We are looking forward to turning prime sites in cities across the UK into vibrant and thriving hospitality assets.”
Nishil Tanna, relationship director at Cynergy Bank, added: “We are glad to partner with Criterion Capital on this transformative journey. Their vision for Zedwell aligns perfectly with our commitment to supporting growth and we look forward to seeing their continued success as they bring Zedwell to some of the UK’s most iconic locations.”
Law firm Harold Benjamin represented Criterion Capital on the deal.
Loan to PineBridge Benson Elliott has an LTV of 72.5% while deal with Metrobox carries an LTV of 53%
What M&G Real Estate has agreed £200m of refinancing deals in the retail warehousing and logistics sectors
Why Firm provided a £50m construction loan to PineBridge Benson Elliot and a £150m facility to Metrobox
What next Loan to PineBridge has an LTV of 72.5% while deal with Metrobox carries an LTV of 53%
The finance team of M&G Real Estate has agreed to provide £200m of refinancing across two transactions within the logistics and retail warehousing sectors.
M&G has lined up a £50m construction loan to PineBridge Benson Elliott for the ongoing development of two logistics properties in Woodford and Enfield, north London. Both sites have planning consent for seven warehouse units totalling 175,000 sq ft, with completion aimed within 18 months. The facility has a loan-to-value ratio of 72.5%.
The second transaction is a £150m refinancing deal with Metrobox, an urban retail warehousing joint venture between Delancey and Tritax. The loan will refinance an existing debt facility secured against four retail warehouses located in Guildford, Crawley, Luton and Solihull. The units are let to tenants including Next, B&Q, Halford, Marks & Spencer, Argos, Sports Direct, Pets at Home and
B&M. The loan has an LTV of 53%.
George MacKinnon, managing director of PineBridge, said: “PineBridge has completed this financing with M&G, which enables the development of two high quality, sustainable urban logistics assets in core central London sub-markets where they are much needed to satisfy the needs of modern occupiers. We look
forward to working with the M&G team in delivering the assets.”
Adam Buchler, managing director of BBS Capital, which advised PineBridge, “We’re delighted to have acted for Pinebridge on
this financing as part of our continued drive into the logistics sector. The M&G team adopted a refreshing and pragmatic approach throughout the process and we look forward to working them on other transactions going forward.”
A spokesperson at MetroBox, said: “Despite the refinancing exercise being undertaken during an uncertain time in the debt market, we were pleased to see significant interest from lenders. It has been great to work with the team at M&G who provided competitive terms. This deal stems from the high quality of the assets and the asset management successes of Delancey and Tritax on our MetroBox JV.”
M&G Real Estate’s finance team has deployed over £13bn across the UK and Europe on behalf of more than 100 institutional investors since its establishment in 2009.
Dan Riches, head of real estate finance at M&G Real Estate, said: “We are committed to financing prime logistics and retail warehousing assets in strategic locations in the UK and Europe which meet the evolving needs of modern businesses. Growth in manufacturing and e-commerce are driving demand for grade A logistics space and our focus remains on supporting this uptick in
sentiment through investments on behalf of our clients that are secured against well-located assets.”
Borrowers are increasingly seeking advice from those who are in the market day in, day out
It’s a fine time for debt advisers. As markets have grown choppier, borrowers are increasingly turning to specialists for advice.
This is the culmination of a long-term trend as the prevalence of debt advisers has been slowly increasing since the financial crisis. They were already popular in the US, where the vast majority of the market is now thought to be brokered.
Tougher markets, changing regulations and a growing number of lenders have made them more popular in the UK and Continental Europe. Rising interest rates, collapsing valuations and market liquidity are also factors since, with lending criteria seemingly changing on a daily basis, it pays to have someone who is in the market day in, day out.
The proportion of transactions using advisers is a matter of debate. One market participant put the proportion as high as 60-65%. “There aren’t many deals in the market without a debt adviser,” said another.
The desire to seek out advice when times get tough is understandable. When interest rates first went up and the office market collapsed in the US, it became difficult to know who was open for business and who was keeping things quiet and waiting for the dust to settle. Borrowers are often reluctant to send over opportunities to people who are known to be closed to new business as they don’t want to share sensitive information unnecessarily. That is where debt advisers come in.
Given the number of processes many advisers run, they spend all day in the market getting terms from lenders. This means that if one lender is quoting particularly aggressively, they should be the first to know. It also means that they know more about how lenders are structuring transactions, whether they’re using back leverage, and what covenants they’re asking for. All of this means that advisers should be able to help structure the transaction to make it attractive to lenders before their analyst even opens up PowerPoint to make the deck.
Rothschild & Co advised on the refinancing of SGS, which owns Lakeside in Essex
Given the speed with which interest rates have risen, many borrowers are faced with a refinancing gap which means that they cannot borrow as much as they did previously. When it comes to refinancing, this creates problems, particularly if they are unable to put additional equity in. In these situations, advisers are useful as they can help restructure the capital stack. On a more day-to-day level, debt advisers also help deal with Q&A and the general process management. With processes taking longer, this removes a lot of administration from people’s plates.
However, there are significant differences between advisers, with different firms focusing on different parts of the market from small deals for private clients through to bond issuances for large public companies. There are now a plethora of debt advisors including specialist boutiques as well as divisions within agencies, banks and other service firms. New firms are continually being set up.
Here we profile some of the more active players in different parts of the market and how they are positioned.
Rothschild & Co
Headed up by Toby Cohen and Caroline Kracke in London, Rothschild often deals with the larger and more complicated end of the spectrum. The team advises a range of clients, from public companies to private companies, funds and sovereign wealth funds. Transactions also vary from secured to unsecured, including loans, public bonds and private placements.
The team also has boots on the ground in Paris, Frankfurt, Madrid, Milan, Warsaw, Stockholm and CEE. The European team typically advises on 30-35 financings per year, raising €10bn-15bn of debt.
The average financing advised on is at the larger end of the spectrum at €300m-400m, though the team also works on some smaller single asset financings of below €100m and the largest current refinancing mandate is about €2.5bn.
In Germany, the team led by Henning Block and Hannes Mungenast has been involved in Adler, Corestate, Accentro and Demire
In France, the team led by Arnaud Joubert and Vincent Danjoux have been actively advising AccorInvest on their €4.6bn maturity extension and the restructuring of Orpea
Eastdil Secured
Eastdil also works on large deals. European debt volumes are typically upwards of €18bn a year across sectors.
In Europe, it has offices in London, Frankfurt, Paris, Dublin and Milan. The team is working on a range of deals, from a £50m logistics loan up to a circa £3bn living loan. The team say they speak to well over 100 global lenders a week.
Eastdil is also very active advising on sellers on investment deals, with the debt team working with the equity team on transactions.
JLL has been expanding its offering over recent years. It has also been hiring to fuel the expansion, poaching Stephen Morita from Eastdil and Max Borchert from Cushman & Wakefield to lead the charge in the Benelux region. They also hired Dominik Rüger from Eastdil to help grow the business in the DACH region.
The team, which is led by Brad Greenway and Edward Daubeney, generally closes around 100 transactions a year and currently has $12.3bn of mandates in the market. Since 2018, the team has closed 490 financings with 155 lenders across 20 European markets.
They focus on a wide range of deals, including smaller ticket sizes, which they say gives them valuable knowledge when it comes to the syndication market. The average ticket size is £150m, though they do deals as small as £15m and as large as £2bn-plus.
JLL also has a derivatives advisory team which works alongside the debt advisory team to assist with interest rate and cross-currency hedging solutions.
Recent deals include:
Advising a Cain-led consortium on a £124m debt package for The Stage in Shoreditch
Running the refinancing process for the Langham Estate, securing a £500m financing package from Ares
The team at CBRE, led by Chris Gow, has completed 22 deals, placing £2.8bn of debt over the course of the first half of the year. The average transaction size has increased this year, reaching £127m compared to £58m last year.
The team, which counts 45 people in 10 countries, is currently advising on a range of refinancings and acquisitions, closing two office acquisition loans in London and Amsterdam in the first half of the year.
Brotherton operates in the mid-market space, with an average ticket size of £50m, though it advises on transactions up to £210m. The team specialises in debt advisory only, offering advice across the financing spectrum.
The team kept busy last year, closing around £1.5bn of deals and they expect to close around £2bn this year.
Recent deals include:
Securing a £200m loan from HSBC to support two build-to-rent assets in east and west London owned by Invesco
BBS plays in the mid-market, catering to a variety of high-net-worth individuals and, increasingly, private equity firms. It specialises in loans ranging from £10m to £250m.
The team, which is led by Joanne Barnett, Adam Buchler and Mark Geraghty, has advised on a range of assets, including living, logistics, hospitality, retail and office.
The team has closed in excess of £600m of financings since the start of 2024, with loan sizes ranging from £11m to £78m. They have a further 35 live mandates and are projected to achieve £2bn of financing by the end of the year.
ASK lends £11.7m for residential redevelopment site in Cricklewood
Specialist property lender ASK Partners has provided an £11.7m loan to property investment and development company Ziser London.
The 18-month loan facility is secured against a single-storey retail warehouse, currently let to Matalan, and set on a 2.2-acre freehold site on Cricklewood Broadway, close to Hampstead Heath and the Brent Cross shopping centre.
The loan facility has been provided to refinance an existing lender and allow Ziser London more time to complete the pre-construction phase ahead of implementing the consented planning permission for a 239-bed build-to-rent scheme.
Guy Ziser, director at Ziser London, said: “We always take a long-term view on an asset’s growth potential and working with ASK has given us the flexibility to be able to take a view that will enable this asset to reach its full potential in terms of value.”
Elliot Blatt, head of origination at ASK, added: “This is an excellent redevelopment site and is a great option for a residential strategy given its location and size.
“This transaction brings ASK’s loan book to £1bn, a milestone we’re very proud of, particularly in such challenging economic times.
“We believe our flexibility as a lender is what has enabled us to continue lending through the cycle by backing well-capitalised borrowers with creative strategies which look to respond to the fast-paced change in demand for UK real estate.”
This deal was brokered by BBS Capital and ASK was advised by Fladgate and Montagu Evans.
Milton Keynes’ Station House opens doors to 200 residential units following £35m loan
A former office building in the heart of Milton Keynes, that has been transformed into a new 200-unit residential development, has been refinanced following a £35m residential investment loan from Secure Trust Bank (STB) Real Estate Finance
Located directly above Milton Keynes Central station, Station House is the result of a conversion of disused offices into 200 vibrant apartments across four floors.
Developed by New York and Bahamas-based real estate specialist, Gold Wynn Group, the scheme is one of the latest property developments in an area predicted to see one of the highest long-term growth rates among UK cities outside London. Having topped the UK Competitive Index for 2023, the development will provide much needed housing at a time when demand is on the rise.
The deal for the three-year residential investment loan, agreed at 59% loan to value (LTV), was led by Mike Feasey, Relationship Director at STB Real Estate Finance, alongside Matthew-Blaine Young, the bank’s Head of Origination. BBS Capital advised on and secured this facility for Gold Wynn, continuing its high level of activity in the refinancing space.
Mike Feasey commented: “It was a pleasure to be able to deliver this transaction on behalf of Secure Trust Bank and showcase many of the bank’s strengths. Our hands-on-approach and team ethos, coupled with a strong working relationship with our professional partners, ensured we were able to deliver on a complex transaction in a relatively short period of time. The success of this deal shows what it truly means to be a relationship-led bank and I look forward to building on this success with Gold Wynn over the years to come.”
Taking no longer than an hour to reach London from Milton Keynes Central station, the development is particularly ideal for commuters working, but not living, in the capital.
Ben Friedland, President of Gold Wynn’s US & UK real estate divisions, said: “We’re delighted to have now opened the doors to Station House’s 200 stylish apartments. Milton Keynes is a thriving area on the rise and Station House is proof of this. As experts in property finance, the tailored approach provided by STB ensured that we were able to seal the deal against the clock, proving it to be one of the quickest refinances we have been involved in.”
The bank’s longstanding relationship with BBS Capital, was crucial to completing the process within an allotted timeframe of three months, with it taking just six weeks from sanction to drawdown.
Mark Geraghty, Director at BBS Capital said: “BBS Capital is pleased to have supported Gold Wynn on this key refinancing and build on its relationship with Secure Trust Bank. This was a notable transaction in the office-to-residential conversion space, demonstrating good liquidity in the marketplace for quality assets with robust business plans and credible sponsorship. The structured finance was arranged and executed over a short timeframe despite current market conditions, which is testament to all parties involved.”
Matthew-Blaine Young added: “It was a pleasure to work alongside BBS Capital once again; this deal is the latest of several success stories we have achieved together. As a result, BBS Capital was confident of our ability to provide the necessary property investment finance and deliver on a significant deal associated with unique challenges.”
Acting on behalf of the bank for this property finance loan was solicitors Shepherd & Wedderburn, while BNP Paribas was the appointed valuer for the deal. Both parties played a vital part in organising the deal, alongside Secure Trust Bank’s experienced Relationship Support Specialist, Julie Percy.
Construction has started at The Lampworks, Birmingham-based property developer Cordia UK’s latest project and inaugural Build to Rent development in Birmingham.
Cordia UK has appointed Shropshire-based construction management practice buildfifty5 to deliver the main construction works for the project in partnership with residential general contractor Pedrano UK.
“Buildfifty5 is delighted to be partnering with Pedrano UK on the delivery of The Lampworks in the Jewellery Quarter. Our appointment as construction manager and delivery partner brings together buildfifty5’s core strengths as an organisation focused on collaborative and practical solutions for our key sector clients.”
Garry Whiting, Managing Director, buildfifty5
Construction at The Lampworks is being supported by Cordia International’s key strategic partner – Pedrano Group. With 15 years of experience in apartment developments across Europe, Pedrano will work closely with local contractor buildfifty5 to provide strategic direction on the project.
“At Pedrano Group, we have a long track record of delivering high quality apartments for Cordia International in Central Europe. We are thrilled to be working with Cordia UK to deliver their first Build to Rent development in Birmingham and will be supporting the project strategically from start to finish.”
Gábor Szulyovszky, CEO, Pedrano Group
The Lampworks scheme will deliver 148 Build to Rent homes in a mix of one-, two- and three-bedroom apartments and affordable homes. It will also feature contemporary commercial units on the ground floor, set in a series of striking landscaped courtyards.
Amenities include a co-working space, individual meeting rooms, a shared lounge, and a communal kitchen/diner fit out with modern designs and the latest technologies.
Residents will also benefit from nearby amenities such as Tesco, Morrisons, and popular restaurants and bars including Hockley Social Club and The Church Pub. The scheme is also a five-minute walk from St Paul’s tram stop and ten minutes from Snow Hill train station.
The Build to Rent development is set to be one of the most energy-efficient projects in Birmingham offering exclusively A and B EPC-rated dwellings. The energy efficiency ratings will benefit both future residents and the building operator.
“The Lampworks is the first development in our Build to Rent portfolio and a unique addition to Birmingham’s rental market – offering contemporary architectural design and amenities in a setting that maintains and reflects the Jewellery Quarter’s renowned heritage. We are excited to be working with our construction partners buildfifty5 and Pedrano UK on the project and look forward to seeing our vision for Great Hampton Street continue to come to life with new residents and independent businesses.”
András Kárpáti, CEO, Cordia UK
The Lampworks – located at the intersection of Great Hampton Street and Harford Street – will reflect the industrial heritage of Birmingham’s Jewellery Quarter. It forms part of Cordia UK’s wider vision for Great Hampton Street – a masterplan to transform the area into a thriving residential and commercial destination.
Specialist real estate investor and lender Octopus Real Estate (part of Octopus Investments) has provided financial support for The Lampworks, with assistance from financial advisor BBS Capital.
The loan was provided as part of its Greener Homes Alliance with Homes England, which pledges to commit £172m in finance and expert support to SME housebuilders, enabling them to build more high-quality, energy-efficient homes throughout England.
“We’re thrilled to have provided Cordia UK with the funding needed to develop this exciting project, conveniently located close to Central Birmingham. It’s a fantastic example of the impact our Greener Homes Alliance has in supporting developers to pursue greener initiatives, and reflects Octopus Real Estate’s commitment to providing quality, sustainable homes.”
Nick White, Head of Development Origination, Octopus Real Estate
As a member of one of the largest residential real estate development and investment groups in Europe, Cordia International (Member of Futureal Group), Cordia UK benefits from a vast track record of international projects and is driving forward innovative practices in the UK residential market.
Alternative lenders must navigate a market in which values are still unsettled and affordability is under pressure.
Interest rate rises have transformed real estate lending, causing the cost of debt to rise sharply, and delivering an unwelcome jolt to borrowers accustomed to the era of cheap credit. Lenders and sponsors in the mid-market now face a radically different business environment compared with 12 months ago.
The mid-market segment is not strictly defined, with market participants typically identifying it as €10 million to €20 million at the smaller end, defined by the point at which borrowers begin to access institutional capital market solutions, and €75 million to €100 million at its upper limit, the threshold at which big sovereign wealth, insurance company and private equity credit players begin to take more of an interest.
Many institutional real estate investment sales and development projects fall within that size bracket, but it is nonetheless a market that has historically been comparatively underserved by lenders, says Manja Stueck, managing partner, Europe debt, at manager BentallGreenOak.
“Underwriting a €20 million ticket is the same amount of work as a €100 million one. Not everyone has the team and the capacity to do it, and neither do they all want to do it. Now, with increasing interest rates and the other challenges we are seeing, it is even more work.”
Hitherto, most mid-market deals have utilised bank finance, and traditional lenders still provide a significant proportion of the available credit. In the UK, for example, the real estate mid-market remains well-served and liquid, says Jason Constable, head of real estate for Barclays Corporate Banking. “Traditional UK clearing banks remain very active, accounting for 41 percent of market share of new loan origination in 2022,” he says. “However, we have seen a sustained trend of attrition as alternative lenders made up of challenger banks and institutional lenders – predominantly debt funds, which have grown origination tenfold since 2012 — and insurance or pension-backed asset managers have continued to grow in prevalence in recent years as the private credit market has evolved.”
Regulations requiring banks to hold a minimum amount of capital on their balance sheets in relation to the risk-weighted profile of their assets, have limited their scope for lending, notes Adam Buchler, managing director at debt adviser BBS Capital. “As values fall, and leverage increases, it means that banks have to reserve more capital, and as a result, they have less with which to lend.”
Banks’ declining influence
While banks have become increasingly cautious over originating large loans, there is more liquidity for mid-market tickets, says Clark Coffee, head of European commercial real estate debt at US-headquartered investment manager AllianceBernstein. Current market conditions have led them to concede more territory in the segment to alternative lenders, however. “If they used to be able to do 10 loans a quarter, now they can perhaps only do five, and they will focus on the deals that have the best mix of sponsorship, collateral and business plan. They are giving up tremendous amounts of market share,” adds Coffee.
Stueck says: “Local banks that covered the mid-market quite well are just not that active right now. In Germany, for example, these banks were active even in development finance. They offered attractive leverage at pricing we would not have been able to compete with. Mid-market borrowers which have historically been able to rely on their relationship banks will now probably have to widen their search a little.”
However, Buchler argues that far from being underserved, there is a growing cohort of potential mid-market lenders from outside the banking sector. “If anything, I would say the mid-market is better supplied from the perspective of the number of lenders than the larger ticket deals. Part of that is because some of the larger players, which typically only target loans of over €75 million or €100 million, are struggling to deploy because of low deal volumes, so they are starting to stretch their criteria to do smaller loans.”
Debt finance comes at a much higher price than before, however, which has had a significant impact on borrowers, says Constable. “The market is in the process of transitioning from what has historically been a benign interest rate environment to one that has seen rates expand materially over a short period of time. This has put pressure on existing covenant structures, constrained debt and leverage capacity, increased consequential refinance risk and driven a greater focus on interest rate risk mitigation strategies.” Real estate markets are in the process of repricing as higher interest rates exert pressure on yields, says David Arzi, chief executive officer at Starz Real Estate, a lending platform that targets the European mid-market: “We are already seeing that in the public space with the REITs coming under pressure.”
For mid-market borrowers that acquired assets at the peak of the market and whose loans are now maturing, falling values make refinancing challenging. “A lot of the property types that are having the most problems refinancing, like multifamily in continental Europe, have good underlying dynamics. However, they traded at such low cap rates, sometimes as low as 2.5 percent, that now, when their debt rolls, they are underwater,” says Arzi. The “wave” of refinancings likely to hit European real estate in the next two years is well-documented. Asset manager AEW estimates a “refinancing gap” of as much as €51 billion could open up between the original volume of loans due to mature in the UK, France and Germany between 2023 and 2025, and the amount of new financing available to repay it.
Deal count falls
Meanwhile, uncertainty over how much further values will fall, together with the prospect of further interest rate hikes, have suppressed investment activity. AllianceBernstein’s pipeline of potential financings for new acquisitions has fallen by around 75 percent compared with last year, says Coffee: “For the moment, the vast majority of volume in the market is refinancing. The name of the game for the next two to three years is largely going to be helping sponsors to get out of repayment situations with existing and incumbent lenders.”
As the maturity dates on those loans approach, lenders, keen to reduce risk, are squeezing loan-to-values at the same time as falling values are eroding the equity available within the capital stack for many investments. Meanwhile, the cost of debt for some borrowers will increase several-fold. “A lot of the refinancing that is taking place today, other than for the most core prime assets where there is still bank liquidity, is dilutive to equity’s target returns,” says Coffee.
“But because the alternative is crystallising that investment to repay the loan in the current difficult market, refinancing is probably still a more attractive option. Right now, the credit market is charging a bit of an ‘option premium’ for the ability of that sponsor to extend its time horizon and wait for better days when rates are expected to come down and transaction volumes will go up.”
Adding equity
Borrowers will increasingly be required to inject additional equity into the capital stack, says Stueck. “The question is, particularly in the mid-market segment, will the cash be there? With larger sponsor groups, often there is more of an option to move cash around and allocate it differently. Some mid-market borrowers may not have that capacity.”
Affordability is a pressing concern for both borrowers and lenders engaged in refinancing. The leap in borrowing costs has put interest coverage ratios (ICRs) under pressure. Coffee observes that an ICR that was 1.5 in a zero-interest rate environment can easily become less than 1.0 today.
“It’s tough for lenders too, to make the numbers work at 5.5 percent base rates plus the lender’s spread,” says Arzi. “There has to be some value-add component to bridge the gap between the income today and some future amount that sizes correctly to the debt. We are looking at financing assets where there is scope to add value and create some growth. If you do nothing with the asset, I am not a real believer that rents are going to grow.”
In such circumstances loans increasingly need to be structured to provide additional security to lenders that interest will be paid. It is easier for sponsors with a substantial pool of discretionary capital to accept those types of levers in a loan structure, says Coffee. “The more institutional the sponsorship, the easier time they have finding solutions because they have more tools in their toolkit.”
Fortunately, the profile of mid-market borrowers has become increasingly institutional. Buchler says: “The mid-market encompasses private property companies and investors, but also institutional borrowers, particularly private equity, which perhaps a few years ago would have participated in larger deals. They are now quite active in the €50 million to €75 million range because a lot of them are adopting investment themes that comprise amalgamating a large number of smaller assets.”
Coffee says he is doing deals with sponsors in the mid-market that he would not have been able to engage with historically because they would have been able to find liquidity through the banking market. “The retrenchment of bank appetite is allowing us to charge higher returns and to take less risk by reducing LTV. But probably the most important benefit is the average quality of our sponsor, our collateral, and our business plan has gone up materially in today’s environment.”
There are attractive opportunities available for lenders to finance mid-market borrowers that are willing to inject capital to upgrade assets so that they meet higher energy efficiency and ESG standards, says Stueck. “If you don’t feel it can be caught up to today’s requirements, then that’s a tough ask. But if it is in a great location with a great sponsor, and they have the cash to put in, we will certainly be looking to support these business plans. As a lender, if you can create value somewhere, that’s quite defensive.”
Investments with an operational aspect, such as hotels and self-storage, have a strong appeal for lenders right now, suggests Arzi. “In this market, it is a good trade-off to take a little more operational risk in return for much greater cashflow.”
He expects investment activity to pick up when investors feel that interest rates have peaked and they can feel more confident about where pricing will settle, possibly around the first quarter of 2024. “We are pretty excited about the amount of transactions that are going to come out of this repricing.”
At present, this remains a complex business environment in which to finance mid-market real estate transactions, however. “I often hear from lenders that they have to sift through a lot of deals before they see one that really makes sense,” says Buchler. “There is the ICR issue, plus every loan that is refinanced needs to be valued, and value is something that people are still struggling to put their finger on.”
With new transactions thin on the ground, investors are increasingly turning to real estate debt
There are few things the real estate business loves more than a trend – and the latest seems to be the decidedly unglamorous world of real estate debt.
Real estate transaction volumes are languishing at their lowest levels in more than a decade. According to MSCI Real Assets, European commercial real estate investment fell to its lowest level in 11 years in Q1 2023, as higher interest rates and economic volatility saw investors press pause on new acquisitions.
This is having an interesting impact on the real estate debt market. With new transactions thin on the ground, swathes of investors struggling to deploy capital into equity strategies are increasingly turning to real estate debt, driven by buoyant demand for refinancing and attractive risk adjusted returns.
Refinancing boom
The Green Street Commercial Property Price Index, which tracks the pricing of institutional-grade commercial real estate, has fallen by 15% since property prices peaked last year, while the values of many secondary assets have fallen far more severely. Lower valuations, delays to business plans and lack of liquidity in the market are pushing many investors who had intended to dispose of their assets to refinance instead.
“There are countless new players in this space looking to take advantage of attractive risk-adjusted returns”
Many borrowers are looking to buy more time and bridge to an exit, to a point where they hope market sentiment improves while limiting the need for further equity injection. Few want to sell into today’s market unless they have to. This has driven a surge in demand for flexible refinancing of this nature, as existing facilities reach maturity and borrowers need to agree new terms to secure the time they need.
New debt investors
The fall in values means facilities are often more highly geared than they were at inception – and beyond the scope of the incumbent lender’s appetite. In these cases borrowers are faced with a choice of either injecting equity in order to extend with the current lender, or seeking alternative options at a higher leverage to minimise the need for further equity. Such situations can present the opportunity for alternative lenders to achieve double-digit IRRs on whole loans, often enhanced further with back leverage if available.
No wonder, then, that the real estate debt market – traditionally dominated by banks, challenger banks and debt funds – is currently awash with new entrants. From private equity groups to family offices, there are countless new players in this space looking to take advantage of attractive risk-adjusted returns by deploying debt capital in this transaction-starved market.
The struggle investors are facing to deploy capital in this environment has prompted us to launch our new joint venture equity initiative. The thesis is to assist seasoned borrowers with proven expertise, pipeline and co-investment capital to align themselves with capital partners – whether institutional or private – who can help scale their business and exploit specific strategies in what is now a largely rebased market.
What do borrowers want?
There is no one-size-fits-all approach, but flexibility and innovative structuring are central to most refinancing facilities in today’s market. Borrowers often want the flexibility to repay loans early if market conditions improve, while wanting to ensure their facility is priced in a way that won’t erode their equity value.
“The cookie cutter days of writing debt are well and truly over”
In the majority of cases, borrowers want to review a range of different options at different leverage points before ascertaining which option is the most accretive or optimises their perceived risk/reward dynamic. This necessitates extensive underwriting and analysis from us as advisors and, depending on the make-up of the capital stack, it requires creative solutions to be implemented.
It is very different to how refinancing facilities were arranged in the benign low interest rate environment of the 2010s, where at maturity a loan would simply be replaced with a similar, often cheaper one.
What does this mean for new lenders?
It should therefore be an opportune time for new players looking to enter the debt market, particularly those not hampered by legacy issues. Lending off rebased values while achieving higher total returns is appealing, particularly given that the risk of further movements in rates can be mitigated by hedging and interest rate floors.
Banks are likely to retrench as they face balance sheet pressure and stricter capital and liquidity regulations, leaving the opportunity for alternative lenders to fill the void. According to the European Banking Authority, European banks may have to allocate as much as €125bn of additional capital against their real estate positions to be compliant with the new Basel III regulations. This is surely likely to temper their appetite for new trades.
To take full advantage, lenders must be prepared to be creative and flexible in their approach to structuring. Each loan will need to be underwritten on a case-by-case basis according to the needs of each borrower, as the cookie cutter days of writing debt are well and truly over.
“Banks are likely to retrench as they face balance sheet pressure”
At BBS Capital, our role as debt advisors is becoming ever more strategic in line with more complex structuring and borrower requirements. Our 20-year track record of helping clients recapitalise and restructure facilities, especially the experience we gained following the global financial crisis, has never been more valuable. Our longstanding relationships with both debt and equity capital across the market means we are well placed to help secure the right solutions for both our borrower and lender partners.
When market activity resumes, new entrants to real estate debt will stand to benefit from the relationships established with good borrowers and advisors during these turbulent times. All of this means that real estate debt will prove much more than just another passing fad.
Debt Funds: A market in flux
Christopher Walker finds out how, for some, the challending market conditions can be turned in to opportunities
The debt fund market has been growing for many years, fuelled by increased demand from borrowers needing to finance new acquisitions, while concurrently bank regulations have tightened, restricting the supply of credit. This regulatory scrutiny has accelerated in recent times, going into overdrive thanks to the Silicon Valley Bank and Credit Suisse debacles.
While it is true that the then-smaller debt fund space was tested by the global financial crisis, Charles Allen, head of European real estate at London-based investment manager Fiera Real Estate, notes that “it was considerably less mature at that point. This will be the first real test since that expansion happened.”
Against this impending challenge, many practitioners are sanguine.
“I think there is obviously going to be some kind of test, but I do not think it is going to be a significant one,” says Christophe Montcerisier, head of real estate debt at BNP Paribas Asset Management. “Lenders have a lot to fall back on. For example, there are a lot of covenants… and the lender has access to cashflows; [they] benefit from an equity cushion. The question is, how thick is that cushion?”
Sources suggest senior debt funds are highly protected with a cushion of approximately 35-50 percent. It is only the junior debt funds, where the cushion is 15-25 percent, that might be more at risk, especially for the previous vintage funds. “Most are structured so that a minimum of 80 percent of the debt is hedged,” Montcerisier adds. “It is only that small minority that are not properly hedged that pose a risk, or when there is a need for refinancing.”
Chris Bates, head of Europe real estate debt origination at global investment manager Barings, agrees: “Borrowers have a greater proportion of equity in their investments and are therefore more motivated to work through loans facing possible distress.”
Extend and pretend
The question remains: have some funds lent too riskily?
Allen admits that “there will be some who have lent too freely and may well face significant loan-to-value (I.’IV) and income coverage ratio (ICR) breaches”, while Bates believes “borrowers who financed using high LTV or mezzanine loans could experience stress as floating interest payments rise and ICR covenants are tested. Furthermore, pressure could be applied from falling valuations potentially impacting LTV covenants”.
Valuations are certainly falling at an alarming rate in certain sectors. Jim Gott, head of asset surveillance at loan servicer Mount Street — which advises on €130 billion’s worth of assets under management across Europe – notes that “the fundamentals are deteriorating across the CRE debt market. Only something like 15 percent of loans reaching maturity have been successfully refinanced so far this year. The rest have been extended or defaulted. I am afraid ‘extend and pretend’ is a Very real phenomenon among debt lenders.”
Most extensions that have taken place have been short-term, according to Gott, typically three months to one year. “l suspect a lot of encouraged divestiture is eventually going to happen. It is important to give time to sell assets rather than to default. The term ‘extend or enforce’ may be where we are heading. Debt funds are very busy currently, they are out there being Very active, seeing assets a lot more than previously and trying to assess the risks, which are being actively managed.”
This high level of activity reflects the more hands-on approach that debt funds take in comparison with banks. “In a risk-free money approach, this means that they are not necessarily riskier,” Gott adds.
Bates agrees: “Generally, debt funds may be more likely to take a proactive approach in resolving issues that may arise across the portfolio given their single focus to manage a fund. This means their decision-making is not being affected by other relationships with the borrower that may exist for bank lenders.”
Client pressure may also be behind this. Paul Spendiff, head of business development, global funds at fund services and solutions provider Ocorian, suggests that managers should expect, and prepare for, increased scrutiny. “Debt managers can expect an increasing investor interest in their risk models, borrower engagement and quality Of loan agency date being fed to the administrators,” Spendiff says.
“Investors will want comfort that the funds’ net asset value is an accurate reflection of the reality of the portfolio.”
Bates points to a wide variation across the market, and suggests the extent of the challenge depends on several factors, including a fund’s strategy and whether a fund was originated when property values and cap rates were at a peak.
Gregg Disdale, head of alternative credit at brokerage WTW, concurs: “There is likely to be quite some variation in performance across debt funds, with those lending deeper into the capital structure (mezzanine funds for example) and into sectors facing greater headwinds to face the biggest challenge.”
The problems identified are sector-specific. Aside from interest rate volatility, Gott notes additional factors that are impacting performance. “The two long-term secular trends of internet shopping undermining retail and the work-from-home phenomenon undermining offices are here to stay,” he says. “In fact, with offices, I sometimes question whether they are not the ‘new subprime?'”
Offices are additionally vulnerable given the question of energy performance and the risk of stranded assets. “This is a very considerable risk,” Gott adds. “We estimate that the amount of capital that is necessary to meet the regulatory requirements by 2030 is as much as E 150 billion (€169 billion) in the UK alone. I would say debt funds are more on top Of this than banks and understand that capital expenditure is neutral as to location, but tenants and rental value are not.”
Spendiff fears “a flight to quality”, particularly away “from the firms and funds that are overweight commercial in sectors such as city centre offices”.
Focusing on vacant office space in London, according to Gott there is currently approximately 5-6 percent in the West End, 7 percent in the City and 9-10 percent in Docklands. “These may be unsettling numbers, but frankly they are nothing compared to the 29.5 percent that the market is seeing in San Francisco,” Gott adds.
Alexander Oswatitsch, head of real estate debt, Europe, at Frankfurt-based asset manager DWS, adds that the latest figures for vacant office space in the US paints a difficult picture: “Clearly the US office sector is in very bad shape. It is likely some big sponsors will be handing back properties and overall market sentiment for offices is negative.
“It will be necessary for some players to have a strategy for any distress. We must be adult about this and, of course, extending arrangements are going to be a consideration if a loan becomes distressed.”
Other sectors are not being affected in the same way, according to Adam Buchler, managing director Of real estate debt adviser BBS Capital. US office market is particularly challenging for debt funds at present and this affects how US funds feel about that sector in Europe as well,” Buchler says. “By contrast, beds and sheds are a lot easier; there is depth in the market.” There is also particularly strong demand for student accommodation and buy-to-rent.
In Germany, problems tend to be confined to the office and retail markets. Markus Königstein, global head Of investment management at Switzerland- based investment manager Empira, admits some residential projects are being delayed. However, it “is not happening to a great extent because Of the significant demand against a background of a supply shock as new construction falls dramatically, he adds.
A new beginning?
It is not all doom and gloom, however. Reflecting this differential sector performance, Montcerisier believes significant support is offered by the strong rental growth across the overall European market. Commercial property rent increases were recorded in all but one Of 10 major markets measured by BNP Paribas Real Estate, with Central London and Warsaw recording the highest increases year-on-year, at 19 and 13 percent respectively. Rather than a crisis, Bates sees these challenging times “as more of an opportunity for debt funds as bank lenders continue to reduce their exposure”.
According to Charles Allen, approximately €200 billion of debt is due to mature in the UK, France and Germany during 2023 and 2024 alone. A large part of this is secured by mainstream bank lenders, who, Allen notes, “are likely to be much more demanding when they renegotiate loans, or indeed may not be there at all. This provides a huge opportunity for debt funds.” For example, Viera Real Estate has launched a €500 million pan-European debt fund based around its new team.
There are further opportunities for debt funds. Banks may consider selling off a piece of a loan to investment vehicles such as debt funds, instead of extending a loan. For example, assuming a loan granted in 2020 at 65 percent I.’IV for five years now has property collateral value that has been reduced by 10 percent, the is mechanically going up to 72 percent.
According to Montcerisier, “In order to avoid extra equity against the loan, senior lender may be tempted to split the loan into two pieces: one up to say 55 percent I.’IV, which will be kept on bank’s books, and one from 55 percent Ill V to 72 percent LTV’ that will be distributed, most likely to debt funds.”
Gott believes debt funds “are taking an increasingly larger share of the market, and this will accelerate”. He notes that, in the US, debt funds currently represent around 40-50 percent of the market, whereas in the UK it is more like 20 percent and in continental Europe it is closer to 10 percent. As banks increasingly withdraw, thanks to the Basel regulations and a more conservative outlook, Gott expects these UK and continental European numbers to double. “Debt funds will not be the cheapest money, but in many cases they may be the only money.”
As a consequence, there are “a lot of new funds being set up”, according to Gott. “We had three approaches in just one week. I think we will see a lot of value-add funds, and also a lot of funds looking to repurpose offices. We are also likely to see some specialist funds looking to make the capital expenditure necessary to meet FSG regulations.”
Montcerisier also expects more diversification in strategies (by property type or by geography) and… that FSG will be incorporated more into the way in which capital is allocated”.
Disdale notes that the denominator effect has led to very subdued fundraising in recent months compared with prior years. Nevertheless, he also believes the economic environment should be supportive for new funds raised “given the likely challenges faced by traditional lenders and of course a less competitive debt fund environment, as fewer are able to raise funds at hoped-for targets”.
Avoiding denominator woes
There are ample opportunities, according to Oswatitsch, “that we would expect greater allocations to the private debt space, if it were not for the famous denominator effect”.
The fall in the value of equities and bonds means alternatives are breaching guidelines for some multi-asset funds. But there is hope, Oswatitsch says: “‘that is not necessarily the case for some US players, and we have seen them branching out and starting to be more active in European markets as they are not suffering from the denominator straitjacket. ‘They are more flexible to shift funds to deploy into real estate debt within their existing illiquid allocations.”
Within alternatives assets, there is a difference between real estate debt and real estate equity, particularly thanks to rising rents across Europe. “Real estate debt appears very attractive compared to real estate equity at this level,” Montcerisier says. “Therefore, I believe there may be further allocations to this subsector.”
While Königstein agrees that the denominator factor remains an issue in the German market, he remains optimistic: “Fortunately, insurance companies are coming from such low allocations to real estate that there is significant headway for them to increase allocations in the medium term. Especially when debt funds are so attractive as banks withdraw from the market and margins rise.”
What next The company is evolving its focus to include operational joint ventures, recapitalisations and restructuring
BBS Capital has hired Stephen Benson as a strategic adviser to the company as part of a broader push to evolve and widen its offering, React News can reveal.
With 20-year-old BBS having started out predominantly as a traditional debt broker, it has now begun expanding its offering by advising on pairing operational partners and capital providers. It also advises on an increasing proportion of more complex restructuring and recapitalisation situations, in response to the market’s growing dislocation.
The market has rebased, and with activity resuming there are going to be people out there with good platforms, good opportunities and a good vision that need to align themselves with the right sources of capital
ADAM BUCHLER, BBS CAPITAL
Benson founded CR Investment Management in 2004 with Jacob Lyons, before its German business split away and the platform was renamed Rivercrown in 2019. Rivercrown specialised in joint ventures with private equity investors focused on distressed equity and non-performing loans, and was largely wound down last year, although it still holds legacy assets.
Managing director Adam Buchler told React News: “Stephen’s experience, particularly on the restructuring side which he has been heavily involved in, is going to be super useful to us as we enter this phase of the market.
“A lot of the refinancing work we are doing are in situations where ideally a sponsor would already be out of a project, a loan is coming to maturity and a business plan has been delayed due to what’s gone on over the past two or three years, and they are now essentially looking to buy more time, limit the need for more equity and bridge to an exit, to a point when there should be more liquidity.”
Benson has joined the company as a strategic adviser
BBS’ joint venture equity initiative aims to “help seasoned operators with proven expertise, pipeline and co-investment align themselves with capital partners who can help them scale their business and exploit particular strategies”.
The company advised on the formation of Hub’s low-carbon city centre strategy with a family office earlier this year, and is in the process of representing Wavensmere Homes on a similar initiative.
Buchler said: “The market has rebased, and with activity resuming there are going to be people out there with good platforms, good opportunities and a good vision that need to align themselves with the right sources of capital.
“We know a lot of the right sources of capital and clearly as a business, if we can marry the two together, not only can that be fee generative for us but then we can be baked into debt mandates going forward.”
Expanded offering
Founded by Buchler, Joanne Barnett and Nick Spencer, BBS now has 15 full-time staff, having recruited director Mark Geraghty from Oxford Properties at the start of the year and associate director Joseph Clery from Rivercrown last October.
In addition to Benson, BBS counts former Bank of America Merrill Lynch EMEA real estate investment banking head David Church and former Crest Nicholson board director Chris Tinker as non-executive directors.
The company’s client base has a particular concentration of private equity firms and while it is predominantly active in the UK, it has also undertaken deals in France, Spain, the Netherlands and Italy. It currently has more than €300m of live hotel financing mandates in Europe.
Over the past year the company’s notable deals have included a £35m financing for Ziser London’s London North Studios with Tristan Capital, arranging a loan with Alpha Property for Galliard’s £100m Belgrave Middleway project in Birmingham, and a £23m financing for H.I.G. Realty Partners with Ask for an office and labs development project in Whitechapel.
Financial company BBS Capital hired workplace design firm Peldon Rose to design their new office in London, England.
“From the outset, 2 Cross Keys Close feels characterful, with a grand entrance that consists of two large double doors harking back to the building’s previous life as an equestrian stable. This dramatic entryway can also be thrown open in the summer months to welcome visitors and give the company a visible presence on the street and in the community.
Stepping inside, brand identity is immediately established, with bespoke signage in the entryway. The team lifted the firm’s colour palette from a dark black to a lighter grey, with orange features, for a welcoming entrance that remains on brand.
As with most central London locations, maximising space is key, and a dedicated storage wall was created in this lobby area. Personalised touches were incorporated, including a cupboard complete with ventilation, primarily for coats and cycle / motorbike gear to dry on wet days; a feature created in response to understanding how team members commute to the office. Cycle storage was also included to remove any potential barriers to healthy commuting and help give employees viable options for travel to work in the capital. Clutter negatively impacts productivity, so helping people keep the space clean is about much more than aesthetics.
To create an impactful client experience, the whole floor plan has been opened up to help the original structure feel bigger and brighter, and the lighting has also been upgraded to lift the previously dark space. In keeping with the colour scheme, feature copper lights hang above a large coffee bar-style tea point, designed for the team and clients to gather and socialise, an element lacking in their previous
workspace. The Peldon Rose interior design team selected a Rustic, on-brand orange tile for the wall to make it jump out from the rest of the space. The brighter colours bring energy and encourage that all-important collaboration and socialisation.
Two meeting rooms sit across the back wall of the ground floor, where the soft grey tones continue. Peldon Rose provided an acoustic finish in each space to maintain the ambience across the office. Dedicated breakout spaces have been implemented across the ground floor, with soft furnishings grouped around a low New York loft-style coffee table, promoting more natural interactions between employees and providing a less formal atmosphere to meet with clients. The pops of orange branding appear throughout the entire space, as well as a core focus on biophilia, helping to encourage end-user wellbeing and spark creativity. Ultimately, the ground floor has a truly buoyant atmosphere, offering a space
where staff can relax, socialise, or entertain clients.”
Hub launches low-carbon city living venture with £75m seed assets
Subsidiary launches with the acquisition of buildings to retrofit in London and Edinburgh
What: Developer Hub has created HubCap, a wholly owned subsidiary with a focus on low-carbon, urban residential projects
Why: HubCap is aiming to meet the demand for city living while also finding more sustainable approaches to development
What next: Expansion planned across the key UK cities
Residential developer Hub has announced the launch of HubCap, a wholly owned subsidiary, set up to deliver low-carbon city centre residential projects across the UK, React News can reveal.
HubCap’s focus initially is on the delivery of emerging models such as aparthotels and co-living, keeping carbon budgets low by prioritising the reuse of existing buildings, as well as optimising operational carbon savings.
Many of the schemes will be retrofits of buildings that are currently offices or other commercial uses, bringing vibrancy to corners of popular neighbourhoods that need reinvigorating.
HubCap has launched with the acquisition of three sites in central London and Edinburgh, with a combined total gross development value of £75m.
HubCap’s scheme on Edinburgh’s Water Street
The two Edinburgh projects are a former whisky warehouse in Leith and printing press in New Town. The London site, located on Ludgate Hill, was previously a bank.
The seed assets have been secured with equity funding through Bridges Fund Management and BBS Capital.
HubCap has strong growth plans for 2023 with an active pipeline of projects in central London totalling £155m. Other UK cities that HubCap is exploring are Brighton, Bath, Cambridge, Glasgow, Manchester, Oxford and York.
For the first projects in Edinburgh, O’Donnell Brown, Glasgow-based winner of Hub’s Archiboo design competition in 2020, has been appointed. Holland Harvey has been appointed on the central London project.
“With HubCap, we will deliver much-needed low-carbon, short-stay urban living solutions – reusing and retrofitting where possible. Finding more sustainable approaches to development is an important growth area”
ROBERT SLOSS, HUB AND HUBCAP
Robert Sloss, CEO of Hub and HubCap, said: “We recognise that uses of some city centre buildings are going to change and our BTR experience has shown the desire of people to live in vibrant urban environments. With HubCap, we will deliver much-needed low-carbon, short-stay urban living solutions – reusing and retrofitting where possible. Finding more sustainable approaches to development is an important growth area, with retrofitting at its heart, and we’re excited to be part of it.”
Miles Keeley, who returned to Hub last year after three years at BlackRock to lead HubCap, added: “HubCap is a hugely exciting prospect. We are primarily targeting sustainable conversions of urban commercial buildings that otherwise have a very limited, useful future life. Weak and changing occupational demand in certain sectors provides an opportunity for us to bring buildings back to life by repurposing them into alternative uses in greater demand.
“To assist in the success of our projects, we are partnering with best-in-class operators with high quality, design-led and sustainable operating solutions. We are seeing strong demand from investors in the kinds of low-carbon options we are pursuing with HupCap within the thriving short-stay living space.”
HubCap is seeking to acquire more sites in strong urban locations across the main UK cities.
Rising cost of back leverage threatens to impede returns
Providers of loan-on-loan finance are pricing in higher interest rates.
Alternative debt providers that use leverage to boost-their-real estate lending returns are facing rising funding costs as providers of loan-on-loan finance, also known as back leverage, price in higher interest rates.
Loan-on-loan finance has gained in popularity with European debt fund managers in recent years because it enables them to reduce the amount of investor capital they need to utilise in a loan deal, driving returns on the capital deployed.
However, market sources say debt fund managers that issued loans in recent months, prior to rapid rate rises, before securing the loan-on-loan finance necessary to meet their target returns, may now struggle to source accretive back leverage.
Meanwhile, debt fund managers aiming to write new property loans are expected to be able to raise the pricing on offer to borrowers, to compensate for their own rising funding costs.
But sources say the narrower margin between loan pricing and the cost of loan-on-loan finance means using back leverage – which some say could as much as double targeted returns in the low interest rate environment- is no longer as accretive.
This could impact the ability of levered debt funds to remain competitive in the current market, argues Adam Buchler, managing director of debt adviser BBS Capital. “If a debt fund that relies on back leverage is targeting returns based on rates that have materially moved, they will have little choice but to increase the cost of their lending in order to maintain the same returns,” he says. “A debt fund that doesn’t use back leverage is likely to have more flexibility and may therefore have the upper hand during times like these.”
Some believe debt fund managers will continue to demand back leverage despite the fact it will not be as accretive as earlier in the year.
William Trotman, partner and real estate structured finance and securitisation specialist at law firm Bryan Cave Leighton Paisner, does not believe the increase in the cost of funds will dissuade debt fund managers from using loan-on-loan financing, but the leverage debt funds will be able to secure may be reduced.
“This is similar to what people expect to see more widely in the senior real estate finance lending market. While the fundamental drivers to use back leverage remain in place, it could impact the extent to which leveraged debt funds are able to use back leverage to enhance returns to the same degree that they could earlier in the cycle.”
Cushioning risk
Meanwhile, sources expect to see more lenders entering the market to provide loan-on-loan finance. As a low-risk form of debt, such financings are popular with banks, says Trotman. He explains that, under Basel III regulatory capital requirements, loan-on-loan lending positions carry a lower risk-weighting than direct real estate loans and require banks to hold less capital against them.
Loan-on-loan facilities are provided at low loan-to-values relative to the value of the underlying asset. For instance, a 50 percent loan-on-loan advance rate to a debt fund that is itself lending at an LTV of 50 percent against the collateral value, means the loan-on-loan provider’s exposure to the value of the underlying property is low.
“This look-through LTV is effectively a double cushion against any risk,” Trotman adds. “For this reason, it may well be that reduced LTV levels elsewhere in the senior lending market have less of an impact of advance rates for back leverage tranactions.”
The pressure points to watch for in today’s febrile debt market
Rising debt costs create new sources of stress in commercial property finance market
On paper, the commercial property debt market today is far better able to withstand shocks than it was when the financial crisis hit. Banks are better capitalised, there are many more lenders out there with different funding sources and leverage is typically lower than in the 2000s.
However, this is not a re-run of the financial crisis. Thankfully, there is no credit crunch, but the market is facing new challenges. Whereas in 2008, the Bank of England responded to the crash by slashing interest rates, now high inflation is forcing it to hike rates at a speed not seen for generations.
The problems and stresses this will create in commercial property are likely to be quite different. Here we take a look at some of the key things to watch out for in the coming months.
Refinancing headaches
As valuations fall, some borrowers will fall foul of loan-to-value (LTV) covenants, but an equally, if not more pressing issue is likely to be interest cover. Many will have hedging in place, but many will not, and as rates rise income left after interest expenses will be squeezed. Interest cover covenant breaches will inevitably become more commonplace. Lenders are expected to be accommodating when it comes to existing loans but refinancing deals will be a different story.
“Lenders will be looking at their books very closely,” says Neil Odom-Haslett, head of commercial real estate lending at Abrdn and president of the Association of Property Lenders.
“I don’t see evidence of distress yet but it has to happen at some point. The issues will come at refinance, mainly as a result of challenges around interest cover.”
At refinancing, the problem for borrowers is that in order to comply with interest cover requirements, they may not be able to borrow as much as they did before.
“I don’t see evidence of distress yet but it has to happen at some point”
NEIL ODOM-HASLETT, ABRDN
There will be different options to explore to manage this. Adam Buchler, co-founder of debt adviser BBS Capital, says there may be “more creative ways” of structuring deals using different hedging products.
But in many cases the only solution will be to put more equity in or seek out more expensive mezzanine debt. Some more highly geared borrowers may even find they have nowhere to go.
New sectors in focus
In recent years, it has only really been owners of retail properties who have faced financing challenges, but that is now set to change. Increasingly office landlords will struggle, and some logistics owners will also be feeling the heat, something that would have been unthinkable at the start of the year.
The sector has seen such strong rental growth and valuation gains in recent years that owners are unlikely to run into trouble with assets bought early enough in the cycle even if they did gear them highly at the time. But with logistics pricing down significantly from peak levels, increasing numbers of assets will be in the danger zone.
Borrowers that bought properties off low yields and haven’t yet had the chance to push up rents in line with the market may be in for a shock when they see how far available LTVs have fallen as a result of interest cover requirements.
This could be a common occurrence if debt costs continue to rise. A popular private equity strategy in recent years has been to rapidly buy up lower yielding warehouses and still achieve high returns thanks to a combination of yield compression, rental growth and gearing.
“Everyone would say we don’t go above 60-65% LTV, but then would make an exception for logistics,” says one leading private equity investor. “Some of those logistics aggregators will be facing some tough decisions.”
The get-out-of-jail card is strong operational performance. The exceptionally high levels of rental growth in logistics will offer a route out of trouble so long as lenders are willing to be patient.
And providing that the operational outlook remains positive, even at refinancing, many borrowers should still be able to find sources of additional debt or equity capital to step in, although the terms may not always be appealing.
Build-to-rent is another sector with low yields that faces potential interest cover headaches, but like logistics, it is benefiting from rental growth, which has accelerated in recent months. Crucially for borrowers, higher market rents are passed on much more quickly, easing interest cover challenges.
Growing gap
Just how tough could things get? AEW published research last month estimating that commercial real estate debt markets in the UK, France and Germany face a cumulative €24bn debt funding gap for the next three years. This is the gap to be bridged between the original debt amount due at loan maturity and the new debt available to repay it. It is significant but well below the levels seen in the aftermath of the financial crisis. There is an important caveat, however.
The estimate is built by considering valuation changes since 2018 and assuming lower available senior LTVs, but Hans Vrensen, head of research and strategy at AEW, says it does not explicitly factor in interest cover which is harder to model. As debt costs rise, accounting for interest cover could reduce available LTVs further even than the AEW model assumes and push up the funding gap.
Ultimately, much will depend on how far values fall. Values largely held steady at the end of the second quarter but the third quarter will be a different story as evidence of weaker pricing in the investment market has built up. The first sign of the size of reductions to expect from September valuations came last week from Abrdn Property Income Trust, which reported today that the value of its portfolio had decreased by 4.2% on a like-for-like basis compared to the end of June. The £540m trust said it believed the decline would be similar to the MSCI index.
Evidence from the investment market would suggest that more write-downs are likely to follow. The Green Street Commercial Property Price Index, which measures the pricing of a broad swathe of commercial properties, is about 15% below its recent peak, having fallen by 4.4% in the third quarter.
Development debt
It is not just in the investment market where signs of debt-driven stress are likely to emerge. Developers will be feeling the heat too. As well as rapidly rising debt costs, they are having to contend with high construction cost inflation and the likelihood that the end value of their schemes will be lower than previously hoped.
Highly geared developers who bought land at the top of the market and face the prospect of selling into rapidly cooling markets like residential for-sale or logistics will be particularly vulnerable.
Lenders are understandably more cautious than ever about development lending. Debt is still available but developers will have to be at the top of their game to secure funding for new schemes.
“We’ve gone from being thorough in our underwriting to forensic,” says Mark Quigley, managing director at Beaufort Capital, a development lending specialist. “We’ve kept our margins and leverage unchanged for the present time, but whether we can stick to the same leverage and pricing depends on just how challenging things become over the coming months.”
Lender stress
Could lenders themselves run into trouble? Higher octane lenders are most likely to face challenges. Inevitably as values fall and debt costs rise, mezzanine lenders will increasingly find they have problem loans on their books but are unlikely to rock the boat while borrowers are still working through business plans that could add value to properties.
There is no evidence of this happening yet but an early sign of trouble will be when they start looking to sell on loans at a discount.
How well lenders are able to cope will depend to a large extent on their own funding. Some may even do better than they would otherwise have done had rates remained at rock bottom levels, as BBS Capital’s Buchler explains.
“There are those that raised capital before all this happened. They’re unlevered and have promised a certain return to their investors predicated on interest rates being close to zero. Suddenly, they’re able to achieve materially higher returns thanks to higher rates.”
Such lenders will be in a good position to be accommodating to their borrowers.
By contrast, those that rely on loan-on-loan financing are most likely to struggle as their costs will be increasing rapidly. These lenders will therefore find it harder to be as flexible with their borrowers as others.
Bridging lending, which is a part of the market that has grown rapidly in recent years, is expected to face problems. Not only are bridging lenders often reliant on loan-on-on financing, but the short-term and higher leverage nature of their loans means many of their borrowers will be facing more problematic refinancing events.
The debt market as a whole may be a lot more robust than it was going into the financial crisis but there are still areas of weakness that look like they will be tested in the coming months. It is just a question of how much damage will be done and what the fallout will be.
The participants in Real Estate Capital Europe’s mid-market roundtable seek to discover opportunity in a segment buffeted by economic headwinds.
This article is sponsored by CBRE Investment Management, and supported by Conduit Real Estate, BBS Capital and Catella Residential Investment Management
What constitutes a mid-market loan in the European commercial real estate market? That is the opening question facing the four participants in Real Estate Capital Europe’s mid-market roundtable discussion, held in London in July.
Loan size is the obvious starting point: EIO million (€11.7 million) to ESO million, says the lender at the table, Alexandra Lanni, co-head of EMEA credit strategies at CBRE Investment Management, who says the market’s larger lending institutions focus on loans above that size band.
For some mid-market-focused lenders, the upper end of the ticket size has reduced somewhat, Lanni notes: “In the past it has been more like €75 million. But when market conditions get more testing, underwrite sizing comes down.”
It is an opinion shared by the borrower taking part — Didier Beltai-Menth, head of debt finance at Berlin-headquartered manager Catella Residential Investment Management — who says a range of €15 million to €75 million has been supplanted by one of €15 million to €50 million. That upper limit is defined by the size of loan that lenders feel comfortable keeping on their books, he says, without the need to syndicate. And lenders are becoming more risk-averse.
“Before, the lending market was driven by the origination team. But in the last four or five years it is driven by the risk teams. We used to call a lender and get their view on a loan within five minutes. Now, it takes two or three weeks while they make certain they will be able to underwrite holding the loan.”
Jonathan Jay, a partner at London-based adviser Conduit Real Estate, says sponsor trends shape the mid-market. “The mid-market, it could be argued, is a function of borrowers’ activity within these loan parameters. Historically, big private equity funds dominated the space. But as they raised, and looked to deploy, gargantuan pools of capital, their place in the mid-market was superseded for the most part by property companies, family offices and so on.”
More recently, Jay has seen a return of private equity firms to the mid-market. “A lot of these PE firms have begun investing thematically, which involves doing aggregation strategies necessitating smaller deals, so by default some PE firms’ business plans now involve incremental, piecemeal acquisitions. Often these strategies are supported by larger facilities, but a coterie of – lenders predominantly challenger banks have stepped into this vacuum to support bolt-on acquisitions.”
Adam Buchler, managing director of adviser BBS Capital, has seen privately owned businesses, including property companies and developers, as active participants in the mid-market, historically. But he is now also seeing large private equity funds and other institutions becoming major participants. “They are not necessarily deploying by acquiring €100 million-plus portfolios. Instead, they are often pursuing aggregation strategies by backing specialist operating platforms. The average deal size might be between, say, E20 million and €40 million, but structured with a facility that allows them to then aggregate additional assets and build scale without rewriting the entire facility.”
Lanni has been lending in the UK mid-market since 2015. She outlines what that means in practice for a lender: “There are not that many buildings in cities outside of London where the loan size will exceed €50 million. So, it does not really matter to me whether you are a private equity sponsor buying regional offices, or a private family office buying local sheds, it is the underlying real estate that ultimately defines the size of the mid-market for us.”
The state of play
The roundtable participants discuss the mid-market as a segment to which some lenders are attracted, but others are reluctant to focus.
Buchler sees new entrants to the mid-market. “Challenger banks that were set up over the last few years and some smaller debt funds started off doing mostly small deals with a maximum ticket of maybe £10million to £15 million. Now they are doing £50 million, or sometimes even £75 million- plus to serve the institutional private equity sponsors that are operating in that space.”
Jay says lenders across the market are increasing their target loan size. “For many lenders we speak to, minimum loan size has crept up,” he says. “It is a lot easier to place loans above £70 million or £80 million than it is smaller transactions.”
Jay believes many lenders are therefore overlooking a segment of the market, by loan size, that generates huge borrower demand. He believes the apparent contradiction is explained by the need for debt funds that have raised vast pools of capital to deploy it profitably, given smaller loans require similar resources to larger ones.
“Since 2008, a lot of debt funds have raised loan-on-loan capital. They are unable to originate loans below certain levels, because a loan-on-loan provider is less willing to lend that smaller quantum of debt. If the overarching loan is small, then the senior lender’s position would be smaller still.
“For many banks, it still requires an element of underwriting that would be inefficient for the lender considering the size of the loan, coupled with the fact it defeats the purpose for some lenders who do it, because they harbour ambitions for significant deployment targets. To make it work, the total loan should be more than 70 million pounds or euros.”
Lanni concurs that the reliance on loan-on-loan finance, together with the increasing cost of such capital in a higher-interest-rate environment, is constraining some lenders. “They have materially been affected by the cost of loan-on-loan financing, to the point where they either cannot be competitive or just do not want to quote because they cannot make the return work.”
Jay questions why very few European mid-market lenders are funding their activities through securitisation structures such as collateralised loan obligations. “Technically that’s your quickest route to exit, and it has been done profitably in double digit returns. So why are more managers not securitising their book?”
Lanni responds: “There are challenges from a disclosure perspective with lots of underlying borrowers, and it is super-expensive to put a CLO in place. You are also left holding just a skinny piece of the debt, which is not ideal if you are looking to deploy more material amounts of capital into – commercial real estate debt.”
It’s not easy to go green
Availability of value-add finance to improve mid-market assets can be problematic, suggests the roundtable.
The real estate industry faces a daunting challenge to refurbish and reposition buildings so that they meet stricter sustainability standards. Buchler quotes research by Savills, which estimates that 87 percent — more than a billion square feet — of UK office stock will need to be improved by 2030 to meet new minimum standards for energy performance. But is debt finance available for them to do so?
“This is weighing heavily on borrowers’ minds. They need a cost-effective solution, but the market is not really well provided-for at the right price,” says Lanni. “Traditionally, heavier capex-led situations would appeal to debt funds. But right now, there are challenges around their cost of capital.”
In some cases, “manage to green” projects may be difficult to underwrite because of the degree of value-erosion suffered by non ESG-compliant assets, says Beltai-Menth. “With some buildings where lots of work is needed, investors could be buying at prices where they need to put half the value of the building in as capex.”
Nonetheless, where the right ingredients are in place, mid-market value-add projects to improve the sustainability of offices, or convert them to life sciences use, are “very workable’; suggests Buchler. “We have found that with well-capitalised sponsors, good assets and a robust business plan, there is good liquidity for debt, although it comes at a cost. It is going to be a real growth sector.”
Supply chain issues and inflation have created uncertainty over the costs involved in such projects, causing market participants who do not need to act now to pause, says Lanni. “If you own the building already, you have to do it. But right now, value-add sponsors are right to be taking a breath while they see how the cost implications pan out.”
Liquidity
While the participants agree that the mid-market appeals to some lenders more than others, Lanni says it is an increasingly competitive space, due in part to the increased presence of financial intermediaries helping sponsors source capital. “We are in as competitive processes in the £10-50 million space as lenders in the £50 million-plus market,” she says.
Catella’s Beltai-Menth says the German residential build-to-rent market, in which his firm is active, remains liquid from a debt perspective. But with loan pricing increasing steeply, potential sponsors are choosing to use their equity for acquisitions instead.
“There is now a minimal differential between buying with all-equity or with leverage,” says Beltai-Menth. “In some cases, the higher cost of borrowing can even have a negative overall effect. Plus, there is the extra work and cost involved in putting the debt finance in place, so those like us who can do it are increasingly buying with equity and maybe putting debt in place later. Borrowers seeking mid-market financing at the current higher prices tend to be developers with capital that is tied up, so that they are seeking financing for their next project, or sometimes those that require bridge financing or mezzanine debt to reduce their exposure to development risk.”
As is the case across the industry, sponsors in the mid-market face strengthening headwinds posed by factors including inflation and rising interest rates.
“Many borrowers are in risk-off mode, and investment selection will be more targeted and discriminating. If they have deals in train, they might price chip, on average between 8 to 10 percent today. But if they do not need to start a deal today, then they are going to wait,” says Jay.
He believes that the market could bounce back swiftly, however. “The two macroeconomic factors that are precipitating the pretty dire situation we are in today are the war in Ukraine and China’s zero-covid policy. But the moment that one, if not both, of those are resolved, people have raised lots of money to deploy, and they are going to be bidding on the same assets, pushing up prices. For the right deals, we are advising clients to capitalise on the short window of shallow market competition.”
It makes sense for borrowers pursuing some strategies to wait out the current turbulence. However, they are in the minority, argues Lanni. “If you are doing a very large value-add business plan where you are facing construction cost inflation, labour shortages and challenges around the cost of debt, and you are worried about whether investment yields will continue to hold up, I can see why you might pause. But that is not the vast majority of the market, which is people making everyday investments. Some 70 percent of our market trades at sub-SO or 60 percent loan-to-value. Sponsors and mid-market lenders can assimilate the risks, price them in and carry on.”
Cost of finance
The discussion turns to debt terms in the mid-market. While risk has increased, not all lenders are widening margins, says Buchler. “Borrowers are already suffering with a material increase in the underlying rate. If you look at the five-year swap rate, it’s now 2.5 percent. Not long ago it was less than 0.5 percent. So that has already been incorporated into the cost of finance. For borrowers to absorb an increase in margins on top of that is difficult, particularly in a market with so much liquidity and competition.”
Meanwhile, the LTV ratios that many debt providers are willing to offer have reduced as they seek to manage risk, he adds.
Margins for loans against residential deals at LTVs of 30 to 50 percent have remained steady, says Beltai-Menth. “But we are seeing some repricing in other asset classes, such as hotels, as lenders try to find the right risk-adjusted level of pricing.”
The participants agree that there is capital available to provide mid-market borrowers with a variety of options. “Lenders can be competitive in different parts of the market depending upon how they raised their capital,” says Lanni.
Those that have raised capital from investors that view real estate debt as an alternative to corporate bonds are coming down the risk curve and offering competitive rates at relatively low LTVs, while for more complex value-add lending there is capital available from debt funds that have raised capital from real estate-focused investors, which need to achieve higher IRRs and are prepared to take on more risk in order to deploy.
In a period when interest rates will no longer remain predictably low, borrowers need to give more consideration to whether they should opt for fixed-rate, or floating-rate debt, says Buchler. “We recently closed a residential development deal. We had multiple bids with various fixed and floating options, so reporting to our client required modelling the SONIA forward curve to provide a like-for-like comparison. As the SONIA rate rose, fixed-rate lenders really started to become much more relevant. These situations allow advisers like us to earn our salt, because there are so many different options that need to be analysed so that they can be compared.”
Retail sector no longer a falling knife
The participants discuss the in-favour asset classes for mid-market lending.
Living sectors remain a post-pandemic winner, says Beltai-Menth: “Build-to-rent and build-to-sell residential used to be a niche asset class. But especially since covid, people have been really jumping into it. ” However, as prices have risen, the industrial sector’s appeal to lenders has waned, observes Buchler. “It’s challenging to underwrite logistics with an exit at sub-4 percent. It will take some time for expectations to change and for activity to return in that market. ”
Retail is making a comeback, according to Jay: “The question was: are you catching a falling knife? Not anymore, and lender appetite is starting to thaw. We have arranged a number of retail financings at pretty sensible leverage and pricing levels, particularly as the real estate is enormously cash generative. Investors are not necessarily buying to convert retail into residential, although that will happen still; they are buying more prime retail property at 8 percent and poorer located properties at 15 percent, but off recalibrated rents, which provides them with a really strong cash flow.”
Hospitality has also bounced back, notes Lanni: “We have seen a billion pounds’ worth of loan requests over the course of the last six months just in the hospitality sector.”
Buchler concurs: “Hospitality is now past the covid shock, and lenders are starting to appreciate the fact that it can be a good opportunity because there is the prospect of outsized returns due to the limited number of players still in the market.”
“Quite a lot of hotels will struggle to meet the energy performance requirements that will soon be in place,” adds Lanni. “Many hoteliers who have got through the pandemic will not want to put their hands in their pockets again to make improvements and could need capex-style financing.”
Maintaining momentum
As the discussion draws to a close, the participants consider the outlook for mid-market lending. Making predictions is no easy task in such a volatile period says Beltai-Menth. “It’s a bit like playing whack-a-mole. So many things are going on inflation, increased interest rates, recession risk and war that it is hard to figure out what will happen in the next six to 12 months. When you take a decision, you do it because of what you know then. But you also know darn well that the next day it could be exactly the opposite.”
In a rapidly unfolding situation, a clear focus on execution is essential to continuing to do business, says Lanni. “If I were a borrower, right at this moment in time, I would want to get everything I have got on the table closed as quickly as humanly possible. If this little period has taught us anything, it is that losing momentum can materially change things. Sponsors should not be sweating the small stuff in loan documents. There is continued opportunity here, but we have all got to be sensible about the way in which we execute.”
Many loans underwritten in recent years in a low-interest-rate environment at yields that represent historic lows, especially for core property, are now coming up for refinancing in a period when the cost of borrowing is increasing, notes Buchler. “What happens when the interest coverage ratio does not support that refinance at the current cost of borrowing? Either there has to be an equity injection into the capital stack, or there is a forced sale. I would be surprised if this doesn’t start to shake up some elements of the market. And it will provide an opportunity for those who are liquid, and not burdened by existing issues of that nature, to take advantage.”
Lanni agrees that for some assets an equity gap will open up. “But right at the moment, we are not really seeing an equity shortage in the market, as long as it makes sense for investors to inject it,” she says.
“My gut sense is that there will be a bit of an outward shift in valuation yield. But I do query whether we will see a sustained material shift in margin. As a lender, you still have to offer a product that is sellable and accretive to returns. I do not know to what extent, but valuation yields and all-in costs of debt are both going to have to give a bit.”
Lenders need to be more cognisant of the opportunities available in the mid-market space, says Jay. “There is not a deep enough bench of lenders to service it, and many of them are only increasing their minimum ticket sizes. Recently, a lender that focused on loans between E 10 million and ESO million asked us to show them deals of over ESO million only. We can do that, of course, but they will face a lot more competition than they would for a smaller ticket, where there are fewer people to call. Indeed, the deal economics are often better and the hit rates often higher.”
Jonathan Jay
Partner, Conduit Real Estate
Jay is a co-founder of Conduit Real Estate, a UK and European debt and special situations capital advisory business established in 2020. He previously worked for a London-based pan-European investment manager and was responsible for capital raising across their equity and debt strategies, as well as debt origination on behalf of a sovereign wealth fund. He has a keen interest in proptech.
Adam Buchler
Managing director, BBS Capital
Buchler set up BBS Capital, an independent real estate debt advisory business, in 2003. The bedrock of the business is arranging and structuring finance for pan-European property investment and development projects. Since 2012, it has added an investment management function. Buchler — with partners Joanne Barnett and Nick Spencer – has led many complex, highly structured and high-profile advisory transactions across the capital stack.
Lanni joined CBRE 1M in 2019 when the company acquired real estate debt specialist Laxfield Capital. She oversees the investment policy, transactions and strategy for the investments team, as well as capital deployment and investor relations. Lanni is also involved in strategic management of the fund portfolio and managing the fund teams.
Didier Beltai-Menth
Head of debt finance, Catella Residential Investment Management
Beltai-Menth joined CRIM in December 2020 as head of debt finance to co-ordinate its European residential funds and asset financing strategies and requirements. Beltai-Menth has 22 years of industry experience and was previously responsible for European fund, real asset and corporate financing within the PA TRIZIA corporate finance division. CRIM is the residential investment management division of Berlin-based Catella Group.
Oxford Properties director joins debt adviser
What: BBS Capital has appointed Mark Geraghty as director of debt advisory
Why: He joins from Oxford Properties where he was a director in the real estate finance and capital markets team.
What next: He will be leading and originating debt advisory mandates across all sectors
London-based debt advisory BBS Capital has appointed Mark Geraghty as director of debt advisory, React News can reveal.Geraghty makes the move from Oxford Properties where he had been a director in the real estate finance and capital markets team since 2015.At BBS, he will be working closely with the senior team led by Joanne Barnett and Adam Buchler.His new role at the firm will see him take the reins in leading and originating debt advisory mandates across all sectors.An ACA-qualified chartered accountant, he brings more than a decade of experience to his new position, having previously worked at Commercial Estates Group and KPMG. At Oxford, he led on more than £3.5bn of financing activity for its loan book in the last three years alone.
Joanne Barnett, co-founder at BBS Capital, said: “To welcome someone of Mark’s calibre is not only a positive endorsement of all that BBS has achieved since inception 20 years ago, but a strong sign of where we stand in the market and our ambitions for the future.
“The quality of our team has always been our differentiating factor as a leader in UK debt advisory, and we very much look forward to building on this position further with Mark’s exceptional skillset and experience.”
UK Property Lenders’ Patience Is Going To Be Stretched, But It Won’t Break
For the last decade or more, lenders have been forbearing in their approach to nonperforming property loans. Unless there are exceptional reasons to foreclose, they would rather wait patiently for values to rise than sell at a loss.
Today, pressure on lenders is slight — even if their expectations of consumer debt problems in the future are high. There is also concern about the global repercussions of China’s looming debt crisis.
The bad news is that with inflation rising, and their own balance sheets under more pressure, that could change.
The good news is, that it probably isn’t going to be soon, thanks to new ways to hedge debt and a focus on equity.
Bisnow spoke to the experts, and their expectation was that lenders have no reason to act hastily.
Most Property Sectors Come With Lower Risks
James Bannister, head of special servicing at Mount Street Group, is vigilant, but not alarmed. “We are yet to see any evidence of stress across the loans managed by Mount Street, but are cognisant of the pressures facing borrowers,” Bannister said. Mount Street specialises in loan servicing, agency and security trustee services and surveillance for performing, subperforming and nonperforming commercial property loans.
“You cannot paint all property loans with the same brush. For investment loans the loan-to-value ratios in recent years have been significantly more conservative than what we experienced during the Great Financial Crash,” he said.
Therefore, it is far less likely a lender will have major exposure and they should obtain a par recovery. So, this time round it is more of an equity issue than it is a lender issue, the issue being how much equity remains within the investment, which will dictate how hard the borrower/sponsor will work to retain that equity.
The story is less good for development finance. Profit margins of 20% are quickly eroded.
Bannister is keeping his eye on risk in the sectors most exposed to a collapse in consumer confidence — retail, hotel, leisure. With little prospect of further government intervention to support them, there is sure to be pain for investors and developers who gambled short on this sector. “The knock-on effect will inevitably be more distress and defaulting on loans,” Banninster said.
New Ways To Reduce The Dangers
The same generally upbeat view is taken by Georgia Contogoulas, director at real estate finance advisory and asset management platform BBS Capital.
“There is a credible argument that the rising cost of debt will push down asset prices as investors cannot access cheap debt to fuel their returns, thus impacting the value of existing mortgage collateral held by lenders,” Contogoulas said.
“Will lenders start asking themselves if this is now the time to look into property values and LTV covenant compliance? Perhaps not yet.”
Downward pressure on property values and falling transaction volumes are widely publicised, Contogoulas said. But so are the dynamics of a real estate sector that is materially less leveraged than in previous downturns and the significant amount of equity capital still looking to deploy into real estate.
Hedging is also playing a part, thanks to a decade of diversification in sources of debt capital. “Pre-Great Financial Crash most real estate loans were hedged via swaps, almost always provided by the same institution as the underlying loan, effectively adding extra leverage to that lender’s exposure to the collateral,” Contogoulas said.
“In the last few years, a significant portion is hedged via interest rate caps rather than via swaps. As caps are essentially an insurance product, once the premium has been paid by the borrower there is no impact on the collateral or the leverage calculation from the lender’s or borrower’s perspective.”
The effect is to cushion the blow of an economic shock. “In previous periods of interest rate volatility, particularly when rates were moving downwards, the hedging aspect was an additional pressure on the bank lenders to act and try to limit their losses. But in the current environment, with a significant amount of lending being provided by lenders who are not under regulatory pressures to mark-to-market the value of their loan collateral, and hedging structures which allow borrowers to continue to service their debt, so we may find that there is less urgency from lenders to act, at least for the time being.
BBS Capital secures development loan for Birmingham resi project
BBS Capital has closed a facility with Alpha Property Lending to provide a peak debt loan to fund the construction of 438 new homes by a joint venture between Galliard Homes and Wavensmere Homes. The nearly five-acre site on Belgrave Middleway, Birmingham, will be a new neighbourhood in a centrally located area in the city, featuring high-quality architecture and substantial amenity and green space. The homes will benefit from shared, secure courtyards and private amenity gardens, in addition to multi-functional public space, and ample car and bicycle parking spaces.
Built over three phases, construction started this month with the completion of the final phase expected in 2024. The site had initially been acquired by Galliard Homes and Apsley House Capital and will be delivered in a joint venture between Galliard Homes, Apsley House Capital, and Wavensmere Homes, with Wavensmere taking the lead on the delivery of the scheme. BBS Capital will also retain a minority interest in the project, which has a gross development value of more than €117.5m (£100m).
The deal represents the latest residential development facility that BBS Capital has advised on. In the past 12 months alone, the debt advisory firm has financed projects in the build to rent, build to sell and co-living space with over 2,000 units combined.
Adam Buchler, Managing Director at BBS Capital, said: “This financing will help to deliver much-needed, high-quality homes in England’s second city. Introducing our longstanding clients and partners Wavensmere Homes and Galliard and running a competitive process to identify the best solution to fund this project, illustrates how we use our relationships among lenders and developers to achieve mutually beneficial results.”
Benjamin Philips, Head of Property Lending at Alpha Property Lending, said: “We’re delighted to have closed this debt facility with Galliard and Wavensmere, supporting the development of hundreds of new homes in the midlands of the UK. We look forward to seeing it develop.”
David Hirschfield, Legal Director at Galliard Homes, said: “Working in partnership with Apsley House Capital and Wavensmere Homes, we are building a new neighbourhood for Birmingham. Featuring quality architecture and ample green space, it will no doubt become one of the city’s living hotspots as it completes in three stages over the next three years. The process to find a suitable lender was highly competitive but seamless and we look forward to expanding our relationship with both BBS and Alpha.”
James Dickens, Managing Director at Wavensmere Homes, said: “This loan marks the exciting next phase in developing these new homes and this beautiful new neighourhood. The commercial attractiveness of this loan is a testament to the strong liquidity in the debt markets for high-quality schemes such as this one.”
London North Studios secures £35m loan from Tristan’s debt fund
A real estate debt fund managed by Tristan Capital Partners has refinanced a film and TV studio owned by UK-based property developer Ziser London.
Tristan Capital said its TIPS One Real Estate Debt Fund has provided £35.4m (€41m) of senior debt to Ziser London for the refinancing of London North Studios. Debt advisor BBS Capital acted on behalf of Ziser London.
Located in Mill Hill, London North Studios comprises 182,764sqft on a 5 acres site.
Guy Ziser, CEO of Ziser London, said the refinancing “will help us to bring forward London North Studios to meet its exceptional potential in the sector”.
Tristan Capital, which completed the deal with debt advisor BBS Capital, said the funding has been provided to refinance and stabilise the asset with a focus on “increasing occupancy and creating recurring business amongst content creators, capitalising on the significant supply-demand imbalance in the sector”.
The core strategy of TIPS One is to provide finance to sponsors with a track record of developing and investing in prime assets to drive income and capital growth, said Dan Pottorff, the head of debt investment at Tristan Capital Partners.
According to Pottorff, the studio market is currently structurally under-supplied and the shift towards content on-demand is driving requirements for well-located filming production spaces and putting pressure on market rents.
“Meanwhile, the asset’s high degree of optionality and potential for residential and industrial re-development makes it an attractive proposition for financing.”
Adam Buchler, managing director at BBS Capital, said: “We’re seeing more and more activity from this alternative but highly attractive asset class which is currently in vogue due to the supply and demand imbalance in the sector.
”As the sector matures, we expect more players will follow the example of forward-thinking lenders such as Tristan’s TIPS One fund in lending against prime assets such as London North Studios.”
Real estate funding specialist, ASK Partners (ASK), has provided a £22.5m senior loan facility to H.I.G. Realty Partners for the expansion of H.I.G’s Life Sciences portfolio.
The loan purpose is to fund the acquisition of a 0.5-acre site in Whitechapel. H.I.G. Realty Partners’ & Lateral’s longer-term plan is to develop the site into a high-quality, lab-enabled life sciences building.
The site is at the centre of the Whitechapel Life Science Masterplan, a partnership led by Queen Mary University, Royal London Hospital and Barts Life Science targeting to deliver one million sqft of lab-enabled space by 2030.
Whitechapel is currently undergoing a £500m, 15-year regeneration effort, aimed at both residential and commercial provision, as well as material improvements to local amenity and community infrastructure.
The area has exceptional transport links, being adjacent to the soon-to-be operational Elizabeth Line and less than five miles from City Airport.
Jérôme Fouillé, managing director at H.I.G. Realty Partners, said: “H.I.G. are delighted to expand New Life Realty, our life sciences platform which benefits from strong fundamentals given the lack of modern space and exceptional tenant demand.
“We plan to further grow in the U.K. as well as across Europe, where key clusters and ecosystems are experiencing material shortfalls in purpose-built laboratory space. With this acquisition, we now have a strong presence in several key life sciences clusters within London.
“With an established platform in place, we will continue to add strategically located sites, in order to deliver superior and ESG-secure products for the expanding life sciences sector by applying our value-add, hands-on approach”
Rob Beacroft, director and head of development at Lateral and H.I.G’s development manager for the asset at Lateral, said: “Our ambition is to deliver an exemplary cutting edge dedicate life science facility to act as catalyst to accelerate the evolution of Whitechapel’s emerging life science ecosystem.”
Joshua Weinstein, head of institutional markets at ASK, added: “We were delighted to provide financing to H.I.G. Realty Partners & Lateral London for the acquisition of this site. It is an excellent investment opportunity with the loan strongly underpinned by the site’s existing use as office space.
“However, as H.I.G. Realty Partners & Lateral London have recognised, its location has huge potential for lab-enabled space. Given the pace of expansion in life sciences in the UK as a result of the pandemic, and the consequent rising demand for lab-enabled space, we are very supportive of their plans and wish them every success.”
BBS Capital acted as debt adviser to H.I.G. Realty Partners and Managing Director Adam Buchler concluded: “It was a pleasure to work with both parties on this transaction and to expand our credentials in this important growth sector. The site presents a strong investment opportunity, and we look forward to seeing H.I.G. Realty Partners’ plans coming to fruition.”
ASK was advised by Shepherd and Wedderburn and H.I.G. Realty Partners were advised by Baker McKenzie.
What? David Church has been appointed to the board of BBS Capital Why? He will serve as a non-executive director of the firm What next? He will be working closely with senior executives Joanne Barnett and Adam Buchler
Independent debt advisory firm BBS Capital has appointed David Church to join its board as a non-executive director.
He will work closely with the senior executive team led by co-founder Joanne Barnett and managing director Adam Buchler.
A veteran in the property sector, David Church has been active for 35 years in the industry. David ran the EMEA real estate gaming and lodging investment banking business at Bank of America Merrill Lynch from 2006 until 2015. He established Leon Partners, an independent real estate advisory company, right after and sold the business to HFF. He has executed numerous landmark transactions including multiple IPOs, take-privates, asset-backed, and other corporate deals.
Most recently, he helped set up Tetrarch Homes in Ireland where he serves as an investor and non-executive director. He also serves as a non-executive director at Invel, the real estate investment and asset management firm focusing on southeast Europe and other select European markets.
Church is joined by Chris Tinker, who will also serve as a non-executive director on the board. He joined BBS in 2020 following his retirement from Crest Nicholson where he was the interim CEO in his last year.
Joanne Barnett, co-founder at BBS Capital, said: “David is one of the most highly regarded individuals in the sector and it is our privilege to welcome him as a board member.
“The expertise and diversity of our team has not only driven the growth of BBS Capital over almost 20 years but has also been key in differentiating us from our peer group and positioning us as a leader in UK debt advisory. David’s experience, reputation and track record will provide fresh perspective and invaluable insight and will support our ambitious expansion plans.”
Tristan’s TIPS One Debt Fund Delivers £22.3m of Financing to Melburg Capital for Industrial Acquisitions
Tristan Capital Partners’ TIPS One “Income Plus” Real Estate Debt Fund has provided £22.3 million of senior real estate debt financing to Melburg Capital under a five-year loan, to support the acquisition and light refurbishment of two distribution and manufacturing assets in Wakefield, West Yorkshire.
The portfolio comprises Sirdar Business Park, a 23-unit multi-let site set across 370,051 sq ft on a 16-acre site, and Wakefield 41, a 210,000 sq ft on an 8-acre single-let estate. Located in the established industrial and national logistics market of Wakefield, the assets are expected to benefit from strong occupier demand owing to their proximity to key transport routes with access to the M62 corridor and M1 providing easy access to both the East Coast and the West Coast ports, while also feeding into the key north–south motorways.
The assets will be refurbished on a rolling basis alongside a number of estate management initiatives, including the enhancement of the properties’ energy performance, to deliver higher rents.
BBS Capital acted as debt advisor to Melburg.
Dan Pottorff, Head of Debt Investment at Tristan Capital Partners, said: “The TIPS One strategy is to provide financing to assets with the potential for income and capital growth and backing sponsors capable of realising this potential. These assets are well-located and primed to take advantage of the demand in an undersupplied market which is benefiting from positive tailwinds stemming from the ‘onshoring’ of supply chains. Melburg Capital is a sponsor with the right track record and skill-set to deliver the business plan.”
Ashil Sodha, Director, Debt Investment at Tristan Capital Partners, added: “The transaction marks our first in the industrial and logistics sector as we look to diversify and extend the parameters of the TIPS One fund. This financing demonstrates Tristan’s continued conviction in the sector and key distribution locations such as Wakefield, the strength of which has been reaffirmed by the recent sale of Amazon’s 2 million sq ft warehouse at nearby Wakefield Hub. We look forward to working with Melburg and further developing the partnership to support their aggregation strategy.”
Jack Burgess, Chief Executive at MelburgCapital Limited, said: “It was a pleasure to work with the Tristan team. We look forward to incorporating additional acquisitions into the facility as our UK focused industrial platform, which now exceeds 2 million sq ft, continues its organic growth.”
Adam Buchler at BBS Capital, said: “This transaction is our first with Tristan Capital and we look forward to growing the relationship from here. We are pleased to have arranged this highly bespoke and competitive facility for our client Melburg as we continue to work with them to support their growth strategy.”
Tristan Capital Partners was advised by Eversheds Sutherland. Freedman + Hilmi and Burgess Okoh Saunders advised Melburg.
Published: 08-Feb-2022 (Tristan Capital Partners Press Release)
Zorin Finance funds its largest loan to date
Zorin Finance has completed its largest deal since its launch in 2011, a £42m loan to Eagle Street Partner, a pan-European real estate investment and asset manager advised by BBS Capital.
The client will use the 48-month term facility for the acquisition of four regional offices in Maidenhead, Newcastle, Uxbridge and Glasgow, which will form the basis of Eagle Street’s first UK commercial offices portfolio.
The facility takes Zorin Finance’s lending to date to over £850m, having funded a total of 187 loans with zero capital losses.
It also marks Zorin’s entry into the investment loan market, where the lender will target a multitude of sectors, including development exit, stabilised residential and commercial, PRS, regional offices, hotels, student accommodation and multi-tenanted estates/portfolios.
The lender will offer loans between £2m and £150m on terms up to five year, with maximum LTVs ranging from 60% to 75% depending on asset class.
Flexible debt structuring will allow for servicing via a combination of interest current and PIK.
Robert Foley, head of investment loans at Zorin Finance, said: “We agree with Eagle Street’s investment thesis that the Covid-19 pandemic has presented an opportunity to exploit price dislocation in the regional office market as both institutional and private investors are forced to rebalance their portfolios.
“It’s been a pleasure working on this deal with Eagle Street Partners and its advisers, BBS Capital, and we look forward to continue supporting them into the future.”
David McLoughlin, chief financial officer at Eagle Street Partners, commented: “This debt transaction is a key milestone as we continue to grow our portfolio of UK regional offices.
“Robert and the team at Zorin Finance share our view of this market, and the value creation which can be unlocked through acquiring higher yielding assets and undertaking active asset management with a flexible debt provider.”
Adam Buchler, managing director at BBS Capital, added: “We’re delighted to have helped our client Eagle Street Partners to finance this portfolio which will form the start of a wider strategy.
“Zorin was able to provide the flexibility and speed that we required, and we look forward to growing the relationship with Robert and the team.”
Aldermore supports a client of BBS Capital with £33.5m facility
Aldermore Bank has provided a £33.5m, ten-year, part capital repayment, part interest only mixed portfolio facility to an established London-based family office. The predominant nature of the loan is residential but includes an element of well let commercial space.
Due to the complex ownership structure, a tailored facility was structured satisfying the needs of both the client and the lender.
Founded in 2003, BBS Capital is a boutique debt advisory business consistently delivering innovative and creative solutions across the entire capital structure in both the UK & Western Europe. BBS identify traditional and non-traditional capital sources for both domestic and international clients and are active across all sectors of the property market.
Joanne Barnett, Co-Founder at BBS Capital said: “It was a pleasure working with Aldermore on this transaction. The team quickly understood the challenges and delivered workable solutions to our client. We look forward to growing this relationship and working together on other transactions.”
Graham Ritchie, Head of Commercial Mortgages for the North at Aldermore, said: “This deal is a great example of Aldermore’s ability to raise capital for further property acquisition which the clients’ existing lender couldn’t do. This deal had a complex loan structure, but the quality of the introduction and the full hands-on involvement by BBS Capital really helped all parties, alongside our own legal firm, Gateleys and the borrowers’ legal firm NWL.”
Debt advisers: Intermediaries eye opportunities as the recovery begins
Covid has added complexity because of the changes in lender appetite but the sector is bouncing back after a three-month hold.
As members of a profession where knowing your market is essential to success, the rapid change and dislocation of the past 18 months have presented particular challenges for real estate debt advisers in Europe, writes Stuart Watson.
“It is a full-time job keeping tabs on the market,” admits Adam Buchler, managing director at London-headquartered boutique advisory firm BBS Capital. “It is so diverse in terms of the number and types of lenders, and the different financing structures on offer, that it requires a lot of resource to stay on top of what everyone is doing. Covid has added to that complexity because of the greater uncertainty and fluctuation in lender appetite at certain times or toward particular asset classes.”
David Yeadon, executive director at UK multidisciplinary adviser SPF Private Clients, recalls that liquidity, and therefore market activity, suddenly dried up for around three months after the onset of the pandemic, before lending activity bounced back relatively strongly. However, the profile of the most active lenders had changed in the meantime.
“UK banks are very conservative and selective about new transactions,” says Yeadon.
“Insurance companies have remained active, but only in certain markets and sectors. International banks have continued to lend, but are also being very selective and offering slightly lower leverage than they were pre-pandemic. However, there is a great deal of liquidity in the debt fund market, where we have continued to see new players emerge. And the majority of transactions we are involved with, whether they are development or stabilised investments, are being financed by debt funds.”
Overall liquidity has returned to pre-pandemic levels, suggests Damien Giguet, founder of Parisheadquartered adviser Shift Capital, but is more targeted towards popular sectors, principally residential and logistics. “We do not see any credit crunch in lenders’ balance sheets,” he says. “But they are rarely contrarian, betting
on an unpopular asset class like investors do. So if there are issues with a sector, they stop lending or reduce their exposure. When covid happened, suddenly there was very little liquidity for hospitality and retail.”
Market activity, and therefore dealflow, is much better than it was in 2020, says Buchler, but still lower than one would normally expect. He attributes that not to a lack of liquidity in the debt market, but to a shortage of opportunities to buy: “A lot of the investors we speak to are struggling to find value. But as we progress through the post-pandemic reopening, we are becoming increasingly busy.”
Difficult sectors
Buchler believes some owners that have been sitting on their hands as they wait for the gap in pricing expectations to close will not be able to wait much longer. “If you are an institution with return targets you need to churn assets,” he says. “And more product available will flow down to more activity for us to advise on. In the meantime, refinancing for our existing clients is a key source of business.”
Although institutional investors with defensive mindsets have gravitated toward core and core-plus assets during the pandemic, Giguet admits that such transactions are rarely a major generator of business for advisers. “We do not bring much value to somebody who already knows the lending market and wants to finance a long-leased core asset in the central business district of Paris or Munich at 50 to 60 percent loan-to-value,” he says. “Those are the deals sought after by the banks right now, so call five of them and you will have five competitive term sheets.”
He argues that advisers always add the greatest value to transactions where debt is harder to secure and, since the pandemic, that category has included most value-add situations: “Before covid, we were working on smaller, difficult-to-structure deals. But institutional clients did not usually need us for their value-add deals because it was comparatively easy for them to find finance. Since covid, we have onboarded more big clients for more institutional situations that involve value-add. The overall market share of debt advisory has increased as a result of the covid crisis because we are working on bigger deals with bigger clients.”
“We have the expertise to operate in sectors where others find it really difficult to secure debt,” says Morris Rothbart, founding and managing partner at UK boutique advisory business Seaford Finance. “So currently, activity is more development-led than anything else. That means speculative industrial and office development, but we are also structuring loans for housebuilders so that they can retain ownership of build-to-rent assets rather than forward-funding them.”
Rothbart says hard-to-finance asset classes will also provide a source of business for advisers. He cites the example of three retail portfolios on which Seaford Finance is advising. “They have performed well through the pandemic, and the owners want to increase their leverage to 55 or 60 percent to release equity for other opportunities. As long as the valuations are not too aggressive and the debt yields are comfortably at 9 percent, the debt funds will provide that,” he says.
Another sector adversely impacted by the pandemic is hotels, which rely on international tourism and business travel. Yeadon says there are still lenders prepared to finance such situations if the deal is correctly structured: “There is a liquidity gap that needs to be filled either from additional equity or a deposit to service the period of recovery, so lenders look for a lower LTV, and they protect themselves by asking for interest deposits of one or two years.”
Restructuring opportunities
A period of widespread market dislocation might be expected to throw up restructuring opportunities as sponsors breach their debt covenants. However, advisers agree that thus far such activity has been limited.
“We are just starting now to see the first restructuring deals,” says Giguet. “It is not yet a massive trend. For distressed situations, such as hotels that have been highly leveraged, we are seeing borrowers needing to find replacement lenders. We are not at the point where they need to find solutions at any price, but where their current loans are at least technically in default. So they are looking at alternative situations to refinance assets.”
A few distressed deals are beginning to filter through, says Buchler. “They are typified by situations in either the hospitality or the retail sector, where there needs to be a wholesale repositioning of a strategy and, as a result of that, it needs a whole different and creative funding solution. There will be opportunities that come out of that and, as debt advisers, we are often quite well placed to spot that at an early stage.”
Yeadon adds: “The irony is we need a more buoyant market before there can be some distress, because lenders start putting clients under pressure when they know that there is likely to be an exit, and at the moment in certain areas there probably is not. Apart from in retail, we have not seen massive reductions in valuations. There is a lot of equity out there wanting to deploy in property, which is supporting pricing. At some stage there will be some casualties, but it is difficult to predict how substantial that will be.”
Dealflow in the advisory world depends not only on market activity, but on increasing market penetration. The use of debt advisers in arranging finance for European real estate transactions has become more widespread in recent years, but Giguet says there remains considerable scope for growth: “There is a slow process underway, in which investors are moving from doing everything themselves to using specialists to optimise their capital raising. It is driven by big private equity funds that have imported that approach from the US. My guess is that eventually Europe will go the way of the US, and everybody will work with advisers.”
He argues that a more complex lending landscape will generate greater demand for advice: “To make sure you do not miss an opportunity and that you optimise
the terms, you have to make sure that you speak to everybody in the market that is relevant. And if you are a smaller investor, you do not have time. Only capital brokers can do that.”
New entrants
Buchler notes that more widespread use of advisers has encouraged new entrants to the market: “You would expect that, as the percentage of deals that is executed through advisers continues to rise. At the smaller end, there are always new outfits popping up – people who leave banks and debt funds very often decide they want to turn their hands to advising.”
However, debt advisory is not an easy space in which to become established. This is because much of the value that an adviser adds will depend on the depth and quality of its relationships with lenders. “It is not just knowing who is out there,” says Buchler. “You build up relationships with lenders over a long period of time. You need to know how that lender operates so you can have confidence they will deliver what they say they will deliver.”
Providing a full end-to-end advisory service is increasingly essential to attract some types of client, adds Rothbart.
“The role of large debt advisers usually finishes post-credit committee because institutional borrowers often have their own in-house finance team directors who
review legal documentation and valuations,” he says.
“Many family offices do not have that expertise and level of sophistication within their own entities. Our strength lies in providing a full execution service, handholding the transaction all the way to completion.”
Buchler says advisers have good reason to be optimistic about the next year or two. “We have been through shocks before – the global financial crisis, Brexit. After the UK referendum, the market was very difficult, but we ended up having our best year in the 12 months following that initial wobble. Sometimes dislocation in the market leads to more opportunity.”
In this period of uncertainty an increasing proportion of deals will be closed with the assistance of debt advisers, predicts Giguet: “This may be the moment when we emerge as a recurring actor in the market – not just as the firemen that you use when you have no other choice, but as a more stable part of the landscape.”
Octopus Real Estate completes £30m loan for North London film and TV studios
Octopus Real Estate, part of Octopus Group and a leading UK specialist real estate lender and investor, has completed on a £30 million loan to aid the acquisition of a 182,764 sqft office and warehouse space to be used as film and TV studios in Mill Hill, North London.
The site, currently known as IBSA House, consists of an office block with ancillary warehouse and yard.
It is located in one of London’s most sought after residential suburbs, under 10 miles from Central London and just a short walk away from Mill Hill East underground station.
The site also privies good access to the M1 motorway. The building was originally built for Carl Zeiss optical works and was most recently the HQ for the Servants of Jehovah’s Witnesses religious institution.
The borrower, Ridgeway Property Holdings, intends to use the site as a film and TV studio, and has signed a management agreement with Purpose Group, who specialise in flexible leasing strategies aimed primarily at the film and television production sector.
Ludo Mackenzie, Head of Commercial Property at Octopus Real Estate, commented:
“The strong location for the film and TV studios makes IBSA House an attractive option for production teams.
We’re thrilled to complete another loan to one of our leading clients, who was introduced to us by BBS Capital many years ago and has an excellent track record of repurposing assets in the London market.”
Adam Buchler, Managing Director of BBS Capital, commented:
“The potential of this asset and the quality of the sponsor ensured we had significant appetite from a number of lenders.
But Octopus Real Estate made a concerted effort to understand the business plan and the vision for the asset and were very pragmatic and flexible in their approach.
We are delighted to continue growing this relationship.”
Investec provides Blue Coast Capital with £24m loan
Investec provides Blue Coast Capital with £24m loan for development of 56 apartments in former Grade-II listed Richmond Royal Hospital. Furthers exposure to high growth residential sector which has proved its resilience during the pandemic.
Investec Real Estate (“Investec”) announces that it has agreed to provide Blue Coast Capital, and their development partners, RER, with a £23.7 million senior facility to fund the development of 56 residential apartments for sale, on the site of the Grade-II listed former Richmond Royal Hospital, south west London. RER, a London focused residential developer, will act as development manager for the project.
The facility will fund a full refurbishment of the building, which was originally built as a private residence in 1882 before being converted into the Richmond Royal Hospital in the twentieth century, with the converted South and North wings undergoing a more comprehensive redevelopment. 56 high end private apartments, a mix of one, two and three bedroom units will be provided, alongside a proportion of affordable housing.
Having acquired the site in 2018, full planning consent was achieved and initial groundwork is underway, with the development due to complete in winter 2022. Residents will benefit from the central Richmond location, with excellent transport links via nearby Richmond Overground and underground station, whilst two of London’s most popular outdoor spaces, the Royal Botanical Gardens and Richmond Park, are both within close proximity.
Barney Kelham, Managing Director at Blue Coast Capital, commented: “The residential development sector remains a key focus for Blue Coast Capital and we are delighted to be working with RER and Investec on this project. We look forward to delivering 56 exceptional apartments in this prime residential location.”
Joshua Weinstein at Investec commented: “The residential sector, both for sale and rent, has demonstrated its resilience over the past 12 months and is a high conviction sector for us in 2021. It’s great to be starting the new year funding this unique project. We were once again able to demonstrate our ability to provide flexible financing solutions on challenging sites. This is our first loan with Blue Coast Capital and RER, who both have significant expertise in the real estate sector, and we look forward to working with them again in the future.”
Tim Farrow, Managing Director at RER commented: “RER are thrilled to be working with our partner Blue Coast Capital, Investec and the wider team on this fantastic development.”
Joanne Barnett, Co-Founder BBS Capital: “We were pleased to be involved with this exciting and unique development. We were confident that when introducing this to Investec they would deliver a competitive, straight forward development facility, despite the challenging circumstances we find ourselves in.”
Investec was advised by Womble Bond Dickinson, JLL and PBC.
The role of debt advisers in these uncertain times
J Paul Getty once said that without the element of uncertainty, pulling off even the greatest business triumph would be dull, routine and eminently unsatisfying. At the time, the oil tycoon was the richest man in the world, so his acceptance of less-than-perfect odds had done him no harm.
Getty died in 1976 so we’ll never know if he would have enjoyed success in the shockwaves that the Covid-19 pandemic brought to the debt markets earlier this year, let alone the lingering doubts around Brexit. What we can be sure of – if the real estate sector is anything to go by – is that clients are greatly valuing expert advice and support in what remains a tricky borrower landscape.
Despite the macro-market uncertainty there are record-breaking numbers of banks and non-bank lenders actively seeking to support good deals and acting as sponsors to finance. The wall of lender money has been boosted by institutional and private equity investor diverting funds to debt strategies, whether via their own lending platforms or supporting third-party loan managers. As with many areas of capital markets and professional services, the real estate finance sector seems to have stabilised since the (very quiet) summer of 2020, although funders will no doubt proceed with great care for the foreseeable future.
Lender caution is reflected in senior debt’s Covid premium. While margins have narrowed since the pricing shock in March 2020, they are still higher than pre-pandemic levels, especially across retail and hospitality businesses as would be expected. The story is more varied with mezzanine capital, depending on the size, shape and structure of debt-fund lenders.
The goalposts have moved significantly for many clients, so conversations with both incumbent and prospective lenders need to be managed. Many loans have unavoidably required an element of restructuring including capital repayment holidays and covenant waivers to accommodate a temporary fall in income. The flexibility and cooperation of lenders has generally been encouraging, possibly to avoid the PR disaster of acting overly aggressive or to perhaps to avoid marking-to-market prematurely.
The pendulum swings both ways. Lenders might also be faced with their own challenging circumstances in unexpected times like these. Despite a willingness to help borrowers, there may be a feeling of relief when a debt advisor is able to present a client with an alternative funding solution. This may become more important into 2021, when wider cracks such as large scale tenant defaults can no longer simply be plastered over. At that stage there will likely be a wider restructuring role for the debt advisor.
Looking ahead, the picture is not necessarily a bleak one. Whilst a number of deals stalled (predominantly development projects) as advisors we have still seen a number of significant loans since the start of the pandemic. For well capitalised lenders looking to deploy funds against high quality assets managed by proven sponsors, there are now opportunities available at more attractive risk-adjusted returns than at the start of the year. Whilst transaction volumes are down, a number of clients will be looking to refinance their core, stabilised assets, particularly in the office and residential sectors, enabling them to lock into swap and gilt rates that remain at historic lows. This trend is likely to continue for banks and alternative lenders.
A holistic view of the market and longstanding relationships with lenders mean that debt advisors are well-placed to help clients navigate an increasingly dynamic and unpredictable market. We can base our advice on the broad range of comparable data we gather about lenders’ appetites across specific sectors and types of project. Ultimately pricing will be dictated by the market but through generating competitive tension between a targeted number of lenders the economics can be optimised for the client’s benefit.
Debt advisors flourish in an environment like this, when there is such a diverse lender landscape. Maintaining relationships with all key players in the market is extremely time consuming and is not an effective use of resources for borrowers. By working in close collaboration with clients to understand their assets and finance requirements, the more empathetic adviser can focus on negotiating and delivering optimal borrowing terms, enabling them to focus on covering the property market to deliver existing projects or source new transactions.
Ironically, none of this would have appealed to Getty. He often ignored expert advice and was notoriously parsimonious. However, we would like to think that in a volatile multi-faceted market the right expert advice and guidance more than pays for itself.
Real estate finance advisory and investment management business BBS Capital has appointed five people as part of an ongoing expansion, including Crest Nicholson veteran Chris Tinker.
Chris Tinker joins BBS from Crest Nicholson as a non-executive director. Tinker spent 32 years at Crest Nicholson and was most recently acting chief executive at the company. He has a combined development portfolio of circa £7bn across 30 sites.
Kazeem Afolabi joins the BBS’s debt advisory services from Eastdil Secured. Prior to this, Afolabi was at Goldman Sachs in its real estate development team.
Ashwin Chockalingam, previously part of JLL’s real estate debt advisory business, has joined BBS’s debt advisory team. Prior to JLL, Chockalingam was a chartered accountant at EY’s asset management tax and structuring team.
Amandeep Uppal is BBS’s new in-house counsel and joins from Fieldfisher, where she was a consultant in the real estate finance team.
Sebastian Patrick joins both the debt advisory and the investment management sides of the business. He previously worked as a development surveyor at Tritax Symmetry.
Managing director at BBS, Adam Buchler said: “These are important appointments for BBS, strengthening our expertise in both advisory and investment management as we continue to expand. Our pipeline of activity is very strong and we look forward to working with our new team members to progress some very exciting opportunities.”
Secure Trust Bank Real Estate Finance has completed a trio of deals with Funding Affordable Homes (FAH), totalling £16.5m
The multi-million-pound loan will fund three new housing developments which will deliver 214 homes for affordable and social housing.
Two of the developments are on the Isle of Wight.
Green Meadows at Freshwater is an extra care housing scheme of 75 one- and two-bedroom apartments for rent and shared ownership.
The other, Ryde Village (pictured top), also comprises 75 one- and two-bedroom extra care apartments, plus 27 two-bed bungalows for older and vulnerable residents.
The final project is located in Rochdale, the development of 37 one-bedroom extra care apartments for vulnerable adults at Ladybarn, Milnrow.
FAH has agreed 20-year management leases on all schemes, with Southern Housing Group for the Isle of Wight developments, and Partners Foundation Limited for the Rochdale project.
Once complete, the developments will be retained by FAH as part of its investment portfolio.
FAH was advised by Edmond de Rothschild REIM, with debt advisory services provided by BBS Capital.
Matthew-Blaine Young, London-based relationship director at Secure Trust Bank Real Estate Finance, said: “Affordable and social housing is a sector in which we are seeing increased activity as a result of the current high demand for homes.
“Secure Trust Bank provided three separate development-to-investment facilities, over five years, to FAH,” he stated, explaining it will get developments “off the drawing board and retain them for income generation and capital appreciation.”
James Whidborne, head of residential fund management UK at Edmond de Rothschild Real Estate Investment Management, added: “This is another milestone for FAH and more evidence of the increasing appetite from the banking and investor universe for affordable housing as an asset class.”
Shiva Hotels secures £230m funding for Marylebone hotel development
Shiva Hotels Group has secured £230m worth of development finance from Cale Street Investments and Crosstree Real Estate Partners to build a luxury hotel in Marylebone, London.
The two real estate investment firms are providing the funding to the UK-based hotel owner and manager to support the construction of a 199-key ‘luxury lifestyle hotel’ through to completion.
BBS Capital acted as debt adviser for Shiva Hotels and, of the initial four-year facility, Cale Street and Crosstree are providing £160m and £70m, respectively, with an option to extend.
It refinances an £80m loan that was in place with ICG Longbow.
The Marylebone Lane Hotel is one of the latest luxury lifestyle hotels being pioneered by the group, with first guests set to be welcomed in early 2023.
Since acquiring the site — which was previously an NCP-operated car park — Shiva Hotels has worked with Westminster City Council and local interested parties to secure planning consent, which features multiple destination restaurants, a rooftop swimming pool, and a subterranean event space.
Construction specialist, John F Hunt, has been appointed to undertake demolition site ground works as well as the initial substructure and frame construction works, with the main contractor to be appointed early next year.
“This is a major milestone for our Marylebone Lane development, and brings the delivery of what we believe will be one of London’s most iconic hotels one step closer,” said Rishi Sachdev, managing director of Shiva Hotels.
“Cale Street and Crosstree are both hugely experienced and highly selective real estate financiers and bring a deep understanding of the UK hospitality sector.
“Securing this package, particularly in the current economic climate, is a further endorsement of our vision to create an unrivalled luxury lifestyle hotel brand and we are extremely excited to be partnering with both parties.
“This is a challenging time for everyone involved in the hospitality sector and our near-term focus continues to be on working closely with all our stakeholders to navigate through this period of uncertainty.
“Longer-term, however, we are steadfast in our conviction that the global appeal of London will continue and that this will translate into strong demand for our carefully curated hotels in highly desirable locations.”
Peter Robinson, a partner at Crosstree, added: “Given the current dislocation in real estate financing markets for projects of this type, Crosstree together with Cale Street are pleased to be working with Shiva in taking forward this prime hotel development.
“While no doubt we are currently in a challenging period for the hospitality industry, we share a longer-term vision of the resilience of London and high quality real estate and locations such as this.”
CoStar Review: Lenders up UK real estate loan pricing due to Covid-19 risk
Real estate lenders have increased pricing for new loans due to the inherent risk caused by the Coronavirus pandemic, although most debt providers have kept pricing unchanged for deals in the pipeline pre-crisis, according to sources canvassed by CoStar News.
“There’s definitely been an uptick in pricing,” Adam Buchler, co-founder of debt advisor BBS Capital, said. “It’s difficult to pinpoint what it is but I would estimate the increase is in the range of 50-150bps. However, from our experience, it would seem that where possible lenders would prefer to take on less risk and limit leverage than look to push the pricing.”
JLL’s Edward Daubeney, who heads the EMEA debt advisory unit for the consultancy firm, agreed that pricing has moved upwards for transactions just launching amid the crisis.
“For core assets, this is in the region of 30-60bps and for value add or re-positioning projects, this is more like 150-200bps. It’s too early to say whether this will be the market norm or whether pricing will move back to pre-Covid. Historically, we have seen a reversion to the baseline over time once the catalyst settles down – in this case corporate spreads have had an impact,” he said.
Daubeney noted most lenders have held pricing for loans in legal documentation, which implies they were in the pipeline before the virus outbreak, although he has heard of a couple of instances where pricing was adjusted slightly upwards.
“We have closed transactions in the last couple of weeks with no pricing adjustments, which is a credit to those lenders. We also have several transactions in closing, with the main problem being timing and the logistics of completing due diligence – for example, valuations with the issue of physical inspection,” he explained.
In Daubeney’s view, pricing for new loans launching during the Covid-19 pandemic has gone up across the whole spectrum of lenders – especially the ones who were manufacturing returns through credit lines. These credit lines have either been withdrawn or re-priced, so overall pricing has to rise, he said. The least impacted in terms of loan pricing are debt funds without leverage and insurance companies – balance sheet lenders generally – who can adjust returns depending on their risk appetite, he explained.
For James Wright, head of real estate finance at Link Group, it is difficult to determine which lenders are set to increase loan pricing the most, as the longer term impact is still unclear. “The only consistency I can see now among a lender group is in the high street clearing banks which have effectively ceased lending for new-to-bank borrowers against real estate assets,” he added.
BBS’s Buchler agreed: “The clearing banks are struggling to look at new to bank business right now. Internally, resources have been directed towards either managing their existing clients or administering the government-backed support schemes that have come out in response to Covid-19. It’s very difficult for them to justify diverting resource away from that, which makes taking on new clients a real challenge.”
CoStar News understands some clearing banks like Royal Bank of Scotland are prioritising the support of borrowers with existing facilities, while delivering additional support to them through the available government schemes. Other clearers like Lloyds Bank are understood to be working on some new opportunities with new clients at the moment, although there is little new business activity across the sector as sponsors evaluate the impact of Covid-19.
In this line, a HSBC UK spokesperson said: “Our priority right now is to support our existing customers during this unprecedented time and help them access the finance they need to navigate the disruption.”
He added: “While our focus is on businesses we have an existing relationship with, we’ll look to support new to bank customers where we can on a case by case basis.”
Meanwhile, the non-banking sector – debt funds, insurance companies and the challenger banks – are saying on the whole that they are open for new lending, BBS’s Buchler said. “We’ve got evidence of this, as we’ve received terms from such lenders in recent weeks on a number of new projects,” he noted.
“Some non-bank lenders however aren’t open for new business, particularly those with liquidity or funding issues. Those that are open are taking a more cautious approach.
Leverage is generally down and pricing is moving up. From their perspective, it’s an opportunity to earn higher risk adjusted returns from a rebased market,” Buchler added.
Non-bank lenders scramble to renegotiate loan terms
Non-bank lenders are frantically renegotiating loan terms with landlords to help them give breathing space to tenants that are unable to pay their rent due to the coronavirus crisis.
Market sources say alternative lenders are being flexible with struggling borrowers even though they are not regulated in the same way as banks, which were told by the Bank of England’s Prudential Regulation Authority last week to take a flexible approach with struggling borrowers and not apply normal accounting rules.
Debt funds and other alternative lenders are agreeing to interest payment holidays and deferring loan repayments for borrowers, many of whom have received significantly less rent than usual for the upcoming quarter.
Adam Buchler, co-founder of real estate debt adviser BBS Capital, said it was encountering a variety of scenarios. “The easiest conversations are when there is still enough cash to meet the debt service, but the interest cover covenants are in breach,” he said.
Buchler added that in such cases, the lender might be asked for a covenant waiver for, say, six months and that “lenders are being very accommodating” in this area.
“Sometimes capital repayment holidays will be requested, which is often relatively easy to give on the lender’s part. The most difficult conversation is when a landlord is unable to meet interest payments as this requires lenders to roll the interest up (postponing payment) and agree to a review the situation in three to six months’ time when hopefully tenants can pay again.”
An alternative lender added that it was not in anybody’s interest to take precipitous action in cases where borrowers can’t make payments. “We will be working collaboratively with our sponsors in those cases,” the lender said.
Another major non-bank lender said debt funds were well positioned because they were typically closed-ended and so not under pressure from investors to do anything that could undermine the value of their investments.
However, there is concern that without regulatory intervention, insurers may struggle to be flexible when lending from their matching adjustment books. Under current rules, they are given capital relief to match certain liability profiles and if they adjust loan terms and offer waivers, that capital relief is forfeited, which is very costly.
Neil Odom-Haslett, head of commercial real estate lending at Aberdeen Standard, said: “I’m sure the regulator will give guidance in due course, but for the time being, insurance lenders, lending via their matching adjustment book, have their hands not only tied, but handcuffed.”
Specialist real estate financier and asset manager Urban Exposure has provided a £42.9m loan to a joint venture vehicle with BBS Capital and Wavensmere Homes for a development in Derby.
The scheme will consist of 474 residential units at the location of the former Derbyshire Royal Infirmary.
The Nightingale Quarter will comprise 349 apartments and 125 townhouses over three phases.
Construction began in mid-December, with the first phase of sales set to launch at the end of this month.
The initial houses are scheduled for delivery by the end of September 2020.
Bottom of Form
Randeesh Sandhu, CEO at Urban Exposure, said: “We are delighted to be supporting a project that will be transformative for central Derby, supporting the delivery of much-needed housing for the local population.
“The site has been disused for several years, which makes it all the more pleasing to provide Derby’s residents with an opportunity to live in a thriving new community in an exceptional location.
“We are also pleased to be working with BBS and Wavensmere who have an excellent track record and a clear desire to work on further developments in the Midlands…”
Nick Spencer of BBS added: “The Nightingale Quarter will offer Derby residents the best of urban living in a carefully designed community, which will offer a large proportion of green space and on-site leisure amenity, while also paying homage to the historic nature of the site.”
Click here for original article, published in Development Finance Today
DRC Capital completes W Hotel refinancing
A fund advised by DRC Capital has refinanced a €65m (£56m) development loan for a hotel in Santa Eulalia, Ibiza, in a deal brokered by BBS.
The original loan funded the development of Santa Eulalia Holding’s W Hotel in Ibiza, the first global luxury brand to be represented on the island.
The new deal has released capital for the redevelopment of other properties in the area.
Joanne Barnett from BBS said: “We are delighted to have helped our client to refinance the development facility for this exciting, placemaking project. DRC were an ideal choice as they understood the real potential of this asset which had only just started to trade.”
Octopus Real Estate, part of Octopus Group and a UK specialist real estate investor, has agreed to provide a £21.2m loan to Wheat Quarter to develop a brownfield site in Welwyn Garden City.
The Wheat Quarter site, the former home of a Shredded Wheat factory, has detailed planning consent which will see it transformed into a residential-led development which will include 697 residential units, 114 retirement units and 130,000 sq ft of commercial space.
The last 12 months have seen Octopus fund several large consented sites totalling £58m across the country, including in Luton, Harlow, Derby, Watford, Manchester, and Limehouse.
Ludo Mackenzie, head of commercial property at Octopus, said: “This is another significant development site for us in the UK. The Wheat Quarter development is an exciting project that will deliver over 1,300 homes. Less than half an hour train ride from London, alongside the proximity to historic market towns and an airport, gives the development mass appeal.”
John West, Wheat Quarter, added: “We are delighted to have concluded the refinance on the Wheat Quarter Project and to establish a new relationship with both Octopus Real Estate and BBS Capital, both of whom provide full understanding and commitment to provide an exemplar service on finance and development.”
Are things starting to look up for shopping centre market?
At the end of last month, Savills published its latest snapshot of the shopping centre investment market in the UK. While much of the report made for predictably depressing reading, it also contained some tentative indicators that the market might be about to turn a corner.
According to Savills, UK shopping centre transactions reached £295m in eight deals in the second quarter of this year, up on the £280m achieved in the second quarter of 2018.
While the total for the first half of 2019 came in at £567m, significantly less than the £913m traded over the same period last year, the report noted an increase in the volume of stock coming to the market, raising hopes that the pick-up in momentum seen in the second quarter will continue.
So is this the beginning of a recovery in the shopping centre market or just a blip?
“While volumes remain depressed, during the course of the second quarter stock started to flow more freely,” says report author and commercial research director Mat Oakley.
Opportunistic investors seem to be taking a renewed interest in the sector, calculating that pricing must be bottoming out.
Gary Roberts, managing director at Praxis Capital, says: “We follow the cycles, so as a business we bought in this sector in 2011 and 2012, when we were last in a recession and it was deemed an opportunistic investment, and we’ve been buying again fairly recently. We’ve bought five shopping centres in the past 20 months.”
‘Not all retail is dead’
However, Roberts says Praxis remains cautious about the nature and locations of the retail assets it looks at. “We are not a buyer of just any shopping centre, but we have a belief that not all retail is dead,” he says.
“The overwhelmingly negative press associated with pockets of failing retail has dragged down the entire market to a point where pricing on the buy side, if you can get hold of assets, is attractive, although there is still quite a big gap between what vendors are looking for and what buy-side capital is willing to pay.”
In addition to identifying suitable assets – and driving down vendor expectations – investors also need to contend with a lack of liquidity in the debt market. “Looking ahead, it is the availability of debt that will play a key role in unblocking shopping centre investment,” says Oakley.
“Buy-side capital might get a bit more aggressive if there was a deeper debt market here,” adds Roberts. “If there was more liquidity in the debt market and we could get it cheaper, then theoretically our price could increase.”
According to Adam Buchler, founder of BBS Capital, some lenders do understand that the current state of the shopping centre investment market presents opportunities.
“People recognise in the lending community that you can’t just label an entire sector toxic,” he says. “The nimbler and more entrepreneurial among the lenders will see this as an opportunity.”
Repositioning retail
Buchler adds that lenders want to fully understand what buyers intend to do with assets before they are willing to lend. “The opportunity depends on the business plan that is put in front of them and the ability of the sponsor to deliver it,” he says.
“Most retail needs to be repositioned in some way, so there needs to be a credible plan on the table. With a shopping centre, it is no longer sufficient to say ‘here is the rent roll, the yield is X and we believe it will increase’. That doesn’t work anymore.”
While investors are clearly still treating the shopping centre market with caution, the hope is that the activity seen in the second quarter is a sign of things to come – and that Brexit will not throw another spanner in the works.
Les Mercuriales: a new vision of Paris from the Omnam Group
Revitalizing Bagnolet in Tomorrow’s Greater Paris
Built in 1975, the 145-metre-tall Mercuriales Towers stand out against the Parisian skyline. Their sleek, timeless silhouettes overlook the French capital from its eastern edge, an area undergoing a profound transformation. Recently acquired by the Omnam Group, with BBS Capital acting as acquisition advisor, les Mercuriales promises to become a symbol of urban regeneration.
David Zisser, Founder and CEO of Omnam Group:
“We are incredibly proud and excited. Les Mercuriales, a forgotten icon of the eastern side of Paris for years and we intend to turn them into a landmark of the new vision of Paris. We want to be leading actors in the resurgence of this part of the city”.
The Grand Paris Project
Remarkably accessible, les Mercuriales are only 25 minutes from the centre of Paris and its two airports. Thanks to their location, the towers have an exceptional visibility. That’s why the towers perfectly characterize the Grand Paris project, an initiative kicked off in 2008 to extend the city’s culture and prosperity to its suburbs. The Omnam Group, a pioneering and diverse global real estate investment- and development group, intends to drive this transformation to deliver significant added value to the local communities. Les Mercuriales are a landmark in the city’s mixed urban landscape, which the Omnam Group is committed to propelling forward.
Innovation Rising in the East
The East of Paris is at the heart of an inspiring effervescence taking hold on the Northern, Eastern, and Southern sides of the city’s periphery. Here, more than anywhere else in Greater Paris, is where creative industries, the digital sector and entrepreneurship are taking root. It’s an area home to incubators and coworking. It’s where urban and public experiments are emerging: co-op gardens, micro-farms, innovative recycling techniques and cultural transformations.
Les Mercuriales are situated right at the gateway to the East. A symbol of redevelopment, Omnam Group’s objective is to revive the community and create a gathering place for the city of Bagnolet. The two towers are intended to be the anti-Défense (the hub of business and finance on the city’s western periphery): vibrant, inspiring, creative, and cosmopolitan – an emblem of digital transformation, entertainment, architecture, culture and solidarity. The renovation project will create a mixed-use complex comprising two hotel branches with up to 850 rooms, and a Plaza open to the city, offering restaurants, a conference centre, a fitness space, office and parking spaces.
The Omnam Group intends to convey its vision of the French capital: even more cosmopolitan, more creative and more open. A new vision of eastern Paris emanating from the Mercuriales Towers.
David Zisser said:
“Over the past years we transformed many forgotten spaces, including the then largest empty office building in the Netherlands that we converted into a 24/7 work and play destination: Ven Amsterdam. This unique business and entertainment complex has brought colour, life and a local & international experience to what used to be a grey business area. What we managed to achieve in Amsterdam is comparable to what we envision for Bagnolet.”
Octopus Property provides £10m acquisition of development site in Birmingham
Specialist Finance Introducer
By Michael Lloyd
Octopus Property has provided regional developer, Blackswan Developments, with a 12-month £10.15m acquisition loan for the acquisition of a development site in central Birmingham.
Currently a Mr Tyre storage facility, the prime 3.6 acre site has planning consent to deliver a mixed-use scheme comprising 395 apartments for rent, including 38 affordable units, all finished to a very high specification.
Ludo Mackenzie, head of commercial property of Octopus Property, said: “We are pleased to be supporting an established local developer with the proposed development of this industrial site into a major PRS scheme, in what is an historical and sought after part of Birmingham.
“The scheme’s viability is well supported by attractive supply and demand dynamics, as well as the wider regeneration activity in the Jewellery Quarter.
“Following on from a recent £4m refinancing provided to a student developer in Liverpool, we are seeing increasing appetite from borrowers for fast and flexible finance in the regions.”
Located within the Jewellery Quarter on the north east fringe of Birmingham city centre, near to the Jewellery Quarter railway and tram station, the completed development is expected to benefit from the delivery of a new ticket hall for the station.
This will have trains connecting to both the city centre and London Marylebone via Birmingham Moor Street. The site also benefits from strong road and other public transport links.
Marcus Hawley, managing director at Blackswan Developments, added: “We are delighted to have completed the purchase of the Hockley Mills site, funded by our partners at Octopus Property. This is another important step in developing one of our key sites in the heart of the Jewellery Quarter.”
Along with 32,600 sq ft of ground floor retail and leisure space and 120 undercroft parking spaces, residents will also benefit from access to 10,000 sq ft of amenity space, including residents’ gym, lounges and a spacious lobby. BBS Capital acted as debt advisor to the borrower.
Adam Buchler at BBS Capital said: “We are delighted to have worked with Blackswan on the acquisition of this key site in the Jewellery Quarter.
Our deep knowledge of the Birmingham market enabled us to present the scheme effectively to prospective lenders and secure the leverage and flexibility that our client required.”
The transaction follows on from a nine-month, £4m refinancing facility provided to an established purpose-built student accommodation developer, secured against a freehold development site in Liverpool, which has planning consent for a 320-bed PBSA scheme and 52 serviced apartments.
Georgia Contogoulas, Candice Sammeroff and Edward Hamilton join the firm
Georgia Contogoulas joins BBS as a senior hire from the debt and structured finance team at CBRE Capital Advisors where she was a senior director specialising in the hospitality sector.
Candice Sammeroff joins BBS in a business development capacity.
Edward Hamilton has joined BBS from Grainger PLC to work on the PRS and investment management side of the business.
Adam Buchler, co-founder of BBS Capital said: “We are delighted to welcome 3 new members to our team. Each addition brings with them invaluable experience that will enable us to grow and improve as a business.”
The three new appointments will help BBS Capital to continue its growth. In 2018 it helped its clients finance c. £1.25bn of property deals across multiple sectors, working with 24 different lenders to arrange investment, development and short term finance.
JAMES BUCKLEY
jbuckley@costar.co.uk
German lenders pull back amid concerns about Brexit
German lenders have put the brakes on their UK lending amid uncertainty about the treatment of UK loans in the Pfandbrief after Brexit.
The Pfandbrief covered bond market offers German banks a very cheap way of refinancing, enabling them to provide some of the lowest-priced debt in the commercial property market.
Experts said concern was mounting over the impact of Brexit on the eligibility of UK loans for the Pfandbrief.
“We have seen a repricing for UK loans by some German lenders that are affected by the uncertainties around how UK loans will be treated for Pfandbrief purposes when the UK leaves the EU,” said Starwood Real Estate Finance in a trading update at the end of last month.
Adam Buchler, co-founder of debt adviser BBS Capital, added: “We are seeing German lenders being considerably more selective in what they will look at compared with last year. Margins have widened on the limited deals they will consider by 25bps to 30bps in 2019 versus 2018.”
Under current rules, loans have to be from the EU, the European Economic Area or other specified countries including Switzerland to be eligible for the Pfandbrief.
Legislation is being drawn up to ensure the continued eligibility of UK loans after Brexit.
A spokeswoman for the Association of German Pfandbrief Banks said new rules to permit existing UK loans in the Pfandbrief would come into force imminently but legislation for new loans may not come through until the summer.
“The regulation for new loans has been brought into parliament, but this act may come only in June, which could bring several weeks without new Pfandbrief business,” she said.
German banks provided £5.7bn of commercial property loans in 2017, making them some of the biggest sources of debt in the market, according to the Cass UK Commercial Real Estate Lending Report. They typically focus on providing senior loans secured against prime commercial property.
Buchler said the pullback from German banks would have a knock-on effect on pricing from competing lenders because of reduced competition.
If recent press is anything to go by, you’d be forgiven for thinking that 2019 is the beginning of the end for the debt advisory sector as we know it.
At the very least, you might expect significant disruption to what has traditionally been a ‘people-based’ business. In 2018, a number of digital real estate finance platforms were launched, claiming to use bespoke algorithms to match borrowers with lenders.
Proptech has revolutionised several property subsectors. But I’m not convinced algorithms will put debt advisers out of a job yet. As the co-founder of a debt adviser, you’d expect me to say that, but let me explain why I feel securing real estate finance will always require the human touch.
Algorithms can outperform humans at repetitive tasks or crunching large, well-organised data; however, intrinsically diverse property projects are nuanced and require the qualitative judgements computers can’t yet deliver reliably.
Securing the best finance package for clients involves the detailed analysis and due diligence of projects, borrowers and teams. We often secure bespoke development or acquisition finance for clients thanks to the details we communicate to lenders – details I don’t believe even the most advanced AI-backed algorithm could analyse.
“Securing real estate finance will always require the human touch”
These are generally less quantifiable factors, such as: the borrower’s in-depth track record; the subtleties of the business plan; the quality of market intelligence and advice from third parties; as well as the back-up plan underpinning the security and so on.
Complex projects, particularly developments, are often affected by planning, political, environmental and social policies. Lenders accept that there will be unknowns at a project’s outset, which is why you can’t underestimate the quality of borrowers, their advisers and the delivery team. The numbers might look great on the appraisal but if the goalposts move, can the borrower ensure that the project reaches a satisfactory completion?
Not a homogenous asset
Lenders usually communicate their appetite to borrowers and advisers by ring-fencing criteria by geography, asset sector or size of ticket; rules that can be programmed into an algorithmic analysis. But as property is not a homogeneous asset, these boundaries are rarely absolute.
Banks and debt funds often lend outside published guidelines for ‘the right’ project or borrower. Understanding where they have done so – information that is rarely public knowledge – gives a good adviser a big competitive advantage.
The benefits of personal relationships hold true across other deal metrics. Often a lender only puts their best foot forward if they have a good chance of closing a deal – and that is best handled through personal relationships.
Similarly, how can an algorithm get an application to the front of the queue or ensure it reaches this week’s credit committee?
A combination of people and technology will achieve the best results for our clients. Last year, we developed a capital database to track lenders and loans in an interactive, searchable way. Debt markets are evolving rapidly thanks to a swathe of new entrants competing to attract market share, differentiating themselves by leverage, pricing, sector and geographic niches and creative structuring. This means more options for clients and more market data for us to collect.
In an increasingly crowded market, algorithms can help track and shortlist potential lenders. But the devil is in the detail – and it is the human touch that delivers approvals and closes deals.
By Joanne Barnett
Joanne Barnett is co-founder of London-based real estate debt adviser BBS Capital
Oaknorth has loaned £10m to Ziser London to acquire Fulham Town Hall.
Located on London’s Fulham Road, Fulham Town Hall was designed by George Edwards and built between 1888 and 1890.
Ziser London will buy the grade II star listed 51,350 sq ft building from a private vendor with plans to turn it into a hotel with restaurants, an event space and a spa, while keeping the building’s original features.
Located on London’s Fulham Road, Fulham Town Hall was designed by George Edwards and built between 1888 and 1890. It was extended between 1904 and 1905, for a cost of £30,000 at the time.
The idea of transforming the town hall into a hotel has been mooted for a long time. A feasibility study was conducted the local authority in 2011 to see whether selling the building to a developer would help to reduce the £133m historic debt burden.
Joanne Barnett, director at BBS Capital, the debt advisor that advised Ziser, said: “Arranging the finance had the potential to be challenging because planning permission to transform Fulham Town Hall into a hotel has not yet been granted. However, OakNorth understood the vision and opportunity enabling us to secure funding to support the purchase of the property for our client.”
Priya Harley, debt finance director at Oaknorth, said: “Once completed, this site will be a landmark property in London, so we’re delighted to be assisting the team and look forward to working with them on additional projects in the future.”
Angelo Gordon and T&B Capital have secured a £7.8m loan from PMM Group Real Estate Finance for the refinancing of The Gara Rock Hotel.
The three year facility, arranged by BBS capital, represents a loan to value ratio of 65% and will allow the owners to “stabilise the asset” following its recently completed full refurbishment.
Jasdeep Mudher of PMM REF said: “We are delighted to support Angelo Gordon/ T&B Capital in the refinance of Gara Rock. The property is superbly located on the Devon coast and offers guests a unique experience. We were further attracted to the transaction by the strength of the sponsors, the management team and sound business plan. The facility fits with our strategy to support sponsors creating value through asset management.”
Alex Pope of T&B Capital added: “Gara Rock is part of a broader strategy by T&B Capital and property developers Bmor to invest in the U.K. holiday and short breaks market. We have a strong pipeline of diversified assets and look forward to introducing more exciting products to market under the Aria Resorts umbrella.”
Joanne Barnett of BBS Capital explained: “Our understanding and knowledge of the hotel debt market ensured that we were able to find the right lender who understood the business plan and could tailor the facility to the stabilisation of the hotel.”
BBS Capital has arranged a facility with Starz Real Estate to
refinance the shareholder loans used to acquire Brixton Market.
The funding is for a joint
venture between Angelo Gordon and Hondo Enterprises, which purchased the 60,363
sq ft London market earlier this year.
Starz Real Estate is a newly
launched debt fund, and this transaction represents its second investment.
Starz provided a five-year
term facility representing an LTV of 68%.
Hondo Enterprises will
continue to lead on the purchase, management and decision-making within Brixton
Market.
Adam Buchler, of BBS Capital,
said: “The unique potential of this asset and the quality of the sponsor
attracted strong interest from a number of lenders.
“In such a competitive debt
market it’s important that we have the confidence to work with newly formed
lenders such as Starz if we are to optimise the position for our clients.”
Truscott Investments, a client of Rocket Properties, has secured a £77m five-year loan to refinance its hotel and retail development at 1-23 City Road near Old Street in London.
The loan from pbb Deutsche Pfandbriefbank will replace a previous facility on the 150,000 sq ft property that was set to expire in 2019.
The structure of the deal, which was arranged by debt advisor BBS Capital, gives Truscott Investments the flexibility to draw further funds against the asset in the future if required.
“We are pleased to have worked closely with pbb Deutsche Pfandbriefbank to deliver this innovatively structured loan that will allow our client to flexibly draw further funds against the asset, as and when required, to assist with the growth of its portfolio,” said Rob Jones of BBS Capital.
Rocket Properties acquired the Grade II listed property, a former office building on behalf of Truscott Investments in 2004, and transformed it into a 394 room hotel with 27,000 sq ft of retail space. The hotel is let to Travelodge and a mix of retail and leisure tenants occupy the space on the ground floor and basement levels.
Charles Balch, head of real estate finance international clients, UK, CEE & USA, at pbb Deutsche Pfandbriefbank, said: “The opportunity to finance this well located mixed-use asset, anchored by Travelodge, sits well with our current lending strategy in the UK.”
Tom Appleton, chairman of Rocket Properties, added: “We are delighted to have completed the refinance of 1-23 City Road on behalf of our client. The new loan arranged by BBS Capital from pbb Deutsche Pfandbriefbank provides the ability to draw down additional funds when required for further investment and development of the portfolio.”
Independent debt advisory shops navigate the small-to mid-sized loan market for clients, finds Lauren Parr.
The most high-profile consultancies might attach themselves to Europe’s largest, marquee real estate lending deals, but the bread and butter for many debt advisors is small- to mid-sized financing transactions.
Boutique firms, ranging from one-person brands to small teams, are hard at work – many located in London, but also across Continental Europe’s larger cities. Some find themselves arranging deals below €10 million, while others focus more on the ‘mid-market’, which is broadly defined as above that mark and up to €50 million.
“It’s a big market; a lot of borrowers are buying assets of that size in the UK and Europe,” says Richard Fine, principal at Brotherton Real Estate, a four-strong advisory practice which set up shop in London in 2014.
Such firms serve borrowers which do not have the in-house finance expertise boasted by larger-scale investors, choosing instead to outsource capital-raising. The bulk of clients, niche advisors explain, tend to be private property companies, family offices, high-net-worth individuals and smaller-scale developers, as well as a handful of institutional clients such as wealth managers, hedge funds and smaller private equity funds. Advisors sell to clients their ability to navigate a wider lending market than many are used to.
“In 15 years, we’ve never seen this fluid a market, with lenders coming in and out all the time,” says Adam Buchler, co-founder of London-based BBS Capital. “To stay on top of who’s out there and what’s on offer in the wider market beyond your own lending relationships is a full-time job.”
Most of an advisor’s time is spent out of the office meeting the increasing number of active lenders, as well as potential and existing clients. “We are often approached by new entrants into the market who say they would have liked to have pitched for a loan we have arranged. It’s our job to find out who is actually committed; some new lenders want to see a lot of product so talk a big game but might not be quite ready to transact in the time frame we require,” says Buchler.
Sourcing loans has also become more challenging for sponsors, with valuations under increased scrutiny and lenders exercising caution in parts of the market such as residential development. Not all debt providers can be relied on for a quick answer.
“Pre-crisis we knew the profile of each lender; today, there is a tremendous amount of inconsistency,” explains Morris Rothbart, founding partner of Manchester-based advisory firm Seaford Finance.
“It has become a real strain. Although each lender has a policy in place and we broadly know where the land lies, we have seen a new phenomenon in the past six months whereby we have been let down by a number of institutions on separate transactions,” Rothbart adds.
In one instance, the lender reduced the amount it was prepared to lend from £10 million (€11.3 million) to £8.5 million on the day of draw-down. While only a 7 percent to 8 percent change based on the scheme’s gross development value, the borrower was unhappy about needing to put additional upfront cash into the deal. “Understanding which banks are reliable has become an important part of a transaction,” Rothbart says.
Brotherton is building technology to track lenders’ offerings. Fine explains the database will allow it to identify trends and which lenders offer the best terms in a particular type of transaction, based on pricing in previous deals.
“Most of the time we don’t run huge processes; we might approach five or six lenders for a particular deal, which means the lenders we’re talking to know they’ve got a good shot of winning a transaction and we can secure better execution and terms,” says Fine.
Helping small- and mid-market clients understand what is financeable in the market is a key part of the job. For example, many sponsors of smaller schemes are grappling with the impact of retail uncertainty, since there is usually a retail component to assets they focus on.
“If you’re building 150 to 200 flats, for example, there are going to be commercial units on the ground floor. Tesco or Costa will take the space, but it’s affecting valuations because no one wants to do a pre-let while the market is struggling,” says Rothbart. “Negative pressure on retail is only adding to what is already a challenging working environment.”
BBS’ Buchler agrees: “If a borrower expects a high street bank to finance a retail parade that includes a questionable tenant at high level leverage and low pricing, they’re going to struggle. It’s an advisor’s job to help them manage their expectations.”
GETTING PAID
How lucrative the small- and mid-market is for debt advisors depends, according to Fine, on “how good you are, how much you can raise and the number of deals your close.”
“We’ve always aimed to have fewer clients that we do everything for, from underwritings a debt package through to draw-down,” he continues. “We want clients to see the value we add as opposed to clients coming to us with a term sheet asking if we can beat it; anyone can do that.”
As is the case with big-ticket deals, fees are typically calculated as a percentage of debt raised, with the size and complexity of a deal and the volume and frequency of business for a client also taken into consideration. “It takes the same effort to do a £3 million development facility as a £30 million development facility,” Rothbart notes.
Development finance can be a major component of small- and mid-market advisors’ business, with vanilla investment deals less frequent. “Properties have aged to a degree that they need redevelopment, yet institutions aren’t taking that level of risk. Ultra-high-net-worth investors, on the other hand, are uninterested in 4 percent to 5 percent returns and are therefore prepared to branch out,” says Rothbart.
The “tremendous effort” applied in such deals, including dealing with valuers, quantity and bankers, is reflected in the advisors’ fee, which can be 1 percent of the debt raised, sources say. Bridging facilities also provide advisors with relatively high fees, while less-common equity-raising can command up to 3 percent, some say.
In a fragmented debt market, borrowers at the smaller end of the scale value advice. “When the market is less fluid, borrowers may be more confident in their own bank offering the best terms. But in a climate like this with so many options, borrowers are increasingly turning to us to find alternatives that optimise their returns,” says Buchler.
The number of advisory firms operating at the smaller end of the deal spectrum has ebbed and flowed in recent years, often rising after banks make redundancies and former bankers seek a new role in the market. “Bankers think they can go across the other side of the table with the aim of servicing ex-clients, but only a few survive,” Buchler says.
While the number of one-person bands fluctuates, the number of mid-market firms building sustainable businesses, investing in staff and technology, is relatively few. The real measure of their worth in the market, however, is their ability to match those without multiple lender relationships with the capital they need.
Size matters
Advisor’s opinions differ as to what defines the small- and mid-markets.
Up to €10m
Considered by most to be the small-scale loan market. The larger advisory firms are unlikely to be seen in this size range, with niche advisors more likely to be active, representing small-and mid-market sponsors.
€10m – €50m
Broadly defined by debt advisors as the mid-market. The type of advisory firms active in this space varies; while niche and mid-sized advisory firms will source business from a range of clients active in this space, it is also likely the larger advisory houses will arrange deals for clients, especially towards the higher end of the range.
Up to $25m
Considered by some US brokers to be the mid-market in the US commercial real estate finance sector. While brokers in the US market tend to be limited to certain parts of the market, many consider the European industry too immature to clearly define advisors’ places in the market.
Quartet of Octopus deals grow regional lending by £35m
Specialist property lender Octopus Property has completed four loans worth a combined £35.2m across separate developments in Birmingham, Derby, Manchester and Edinburgh.
Octopus backed the acquisition of DRI hospital for a resi-led redevelopment
The four transactions are:
• A six-month, £11.3 m acquisition loan to the Canal & Riverside Trust for a Birmingham office campus with permitted development. Half the campus has consent for 250 residential units with the remaining 45,000 sq ft of office space let to HMRC & Environment Agency for a further nine years
• A 12-month, £8.2m loan for the acquisition of the old Royal Infirmary in Derby by Nightingale Derbyshire. The property comprises a cleared site of 18.5 acres, with outline planning permission for up to 500 residential units
• A 12-month, £5.7m loan to support the acquisition of a 135 bed Holiday Inn Express. The hotel is located on a recently developed sports campus between Liverpool and Manchester
• A nine-month, £10m loan for Edinburgh Marina’s acquisition of six freehold plots that form part of the Granton Harbour Estate in Edinburgh. Totaling 19 acres, planning consent has been granted for a mixed use scheme with residential, hotel and retirement living units surrounding a 340 berth marina.
The deals represent Octopus Property’s biggest lending spree outside of London and the south east to date. Ludo Mackenzie, head of commercial property at Octopus Property, said: “As we grow the Octopus Property business it is our intention to substantially increase lending activities beyond our original core markets of London and the South East. While we have always been a national lender, we are now regularly seeing high quality opportunities to back talented investors and developers in the regional markets.”
Sirius Private Clients acted as broker on the Birmingham transaction. BBS Capital acted as broker on the Derby transaction. John Charcol acted as broker on the Edinburgh transaction.
Helaba continues UK drive with London office tower loan – Exclusive
The German bank has provided £55m for the acquisition of The Relay Building by a consortium including affiliates of Harbor Group International and ZC Ronogil.
Germany’s Helaba has financed the acquisition of The Relay Building in central London with a £55 million (€61.7 million) loan. The five-year facility, arranged by debt advisory firm BBS Capital, has been provided to support the purchase of the mixed-used tower by affiliates of Harbor Group International, along with affiliates of joint-venture partner ZC Ronogil. The consortium acquired the tower for £90.75 million, which implies a loan-to-value ratio of 61 percent.
Built in 2014, the 105,996-square-feet property comprising office and retail space is let to a range of blue-chip tenants including Blockchain, MindSpace, Paddy Power, Pret a Manger and Tesco. The building is located at 114 Whitechapel High Street in Aldgate, an area that has benefited from substantial development, investment and regeneration activity in recent years.
“The significant appetite from lenders allowed us to be selective. Our decision to go with Helaba was based on a combination of highly competitive economics and our confidence in their ability to meet the required closing timetable, which was very important for our clients,” said Joanne Barnett of BBS Capital.
“The deal demonstrates that well-located London real estate remains an attractive asset class for global investors and debt providers alike,” she added.
Helaba has faith in the UK real estate market. In November last year, the bank financed another London office purchase by Harbor, with a five-year, £31.2 million loan for 8 Bouverie Street in central London.
In 2017, Helaba’s new lending in the UK totalled €470 million, up by 81.6 percent, year-on-year, according to the bank’s latest annual report.
BBS Capital, a debt adviser and asset manager, has arranged £59.8m of finance for BYM Capital from specialist residential property lender Pluto Finance.
The finance will be used to develop New Horizons Court in Brentford, one of London’s largest ever permitted development (PD) schemes.
The site comprises four buildings, including Sky’s former HQ, and the facility will enable the conversion of the 140,248 sq ft office campus into 268 studios and one and two bed residential apartments.
BBS Capital arranged a 36-month loan facility at a 65% LTGDV. At £59.8m this represents Pluto’s largest loan to date. BBS Capital has been active in the residential and permitted development sectors and drew upon its extensive recent knowledge of the lender market to secure the optimal facility for its client.
Lending Director of Pluto Finance, Mario Ioannides, said: “We were delighted to be supporting the development of this residential scheme. It will enable private buyers and particularly first-time buyers the opportunity to own their own home in London at affordable prices, starting from as little as £250,000. This is our largest loan to date and we have good appetite to continue supporting further similar sized residential developments in and around London particularly where flats will be registered for Help-to-Buy.”
Conversion of the properties at New Horizons Court started towards the end of 2017 and is expected to be completed in in early 2019.
It is an exciting time for BBS Capital. In 2017 it helped its clients finance over £1bn of property deals across multiple sectors. One of its notable recent deals was arranging the refinance of the landmark NOBU Hotel Shoreditch in March 2018, which comprised a £68.5m loan across senior and mezzanine facilities. The Mayfair based firm operates in the UK and Western Europe with an experienced and specialist team.
PBB and LaSalle IM refinance Nobu Hotel in Shoreditch with £68.5m
Deutsche Pfandbriefbank (PBB) and LaSalle Investment Management have extended a £68.5m debt facility to Willow Corp Sarl, owners of the Nobu Hotel in Shoreditch.
The facility will replace the development loan that funded the building of the 8,415 sq m hotel, which opened to guests in September 2017.
PBB has provided a £48.5m senior loan and LaSalle Investment Management provided a £20m mezzanine loan through the £804m LREDS III fund. BBS Capital, the debt advisor and asset manager, arranged the refinancing.
Nobu Hotel Shoreditch is located at 10-50 Willow Street. The fashionable, 148-room hotel and spa, was originally designed by world acclaimed architect Ron Arad and was delivered by Ben Adams Architects. Nobu Hospitality was selected to operate the property under a 15-year management agreement.
Joanne Barnett of BBS Capital, said the refinancing was secured “on highly competitive terms”.
Amy Klein Aznar, head of debt investments and special situations at LaSalle Investment Management said: “Nobu London is an excellent example of our ability to support sponsors from development through to asset stabilisation. It was a pleasure to work with Deutsche Pfandbriefbank and BBS Capital on this great transaction. Having successfully closed at £804m in 2017, LREDS III has now deployed £233m across seven real estate debt investments across Western Europe.”
Charles Balch, Head of Real Estate Finance UK, CEE and International Clients at pbb, said: “We were delighted to provide Willow Corp Sarl with a senior debt package to refinance their construction facility, working alongside both LaSalle Investment Management and BBS Capital.”
In 2017, BBS Capital it helped clients finance over £1bn of property deals, including arranging the acquisition finance for WeWork’s Fox Court building in Grays Inn Road, London. PGIM Real Estate Finance has provided a £50.1m loan to the private Middle Eastern investor which acquired the Midtown office in March 2017 for £101.45m.
Instant gratification culture is affecting how we borrow money
Adam Buchler, co-founder of London-based real estate debt adviser BBS Capital, argues that the culture of instant gratification is feeding into the debt market.
The seemingly never-ending march of new technology and the access to instant information, goods and services are combining to make people less patient than ever before.
And who can blame us? Not content with next day delivery, we now expect Amazon to deliver to our doors in a matter of hours; Deliveroo riders bring food from our favourite restaurants in minutes; and we don’t just choose what TV to watch – but when we want to watch it, too.
But is this culture of instant gratification in our personal lives now also starting to have an impact on the way we do business and, in particular, how we borrow money?
The evidence from our business would suggest that the answer is yes. Both buyers and sellers are more reluctant than ever to wait weeks or months for transactions to complete.
They want deals to happen quickly – and certainty of performance has become critical for both sides. Arranging debt finance has always been one of the elements of the acquisition process with the greatest potential to cause delays.
As a result, debt-backed buyers have often struggled to compete with those able to close in cash. This is no longer the case.
The recent surge of alternative lenders such as debt funds, hedge funds and challenger banks – many of whom market themselves on their speed of execution – has dramatically reduced the time it can take for a deal to close.
Speed and certainty
There has been a distinct increase in demand for short-term finance as a result. Last year, 26% of our business (by volume) was for loan facilities with a duration of 18-months or less, excluding development finance. This compares with less than 5% just three years ago.
Our clients are increasingly demanding speed and certainty and they are willing to sacrifice the pricing advantage of traditional lenders in order to achieve this.
At this point in the cycle, with low market liquidity and rate rises on the horizon, many investors – both large and small – are increasingly choosing debt over equity for their real estate exposure.
In the first quarter of 2018 alone, Laxfield Group, TH Real Estate and UBS Asset Management all launched new debt funds of approximately £500m each.
We continue to see new entrants to the debt market who compete aggressively to gain market share and disrupt the traditional lending market. In 2016-17, we closed deals with 12 lenders with whom we had never previously worked. This was unprecedented for us.
While the new lenders can’t always compete on price, they can often provide the speed, liquidity, flexibility and certainty that the market needs. It’s about getting the deal done, fast.
In November 2017, we arranged a £31m loan for a private client with Octopus Property. The facility was required to fund the acquisition of an office park that had secured one of London’s largest ever permitted-development consents.
We had just two weeks to arrange the finance as our client was competing with institutional bidders. The point is that debt facilities – like our shopping and restaurant food – really can now be delivered more quickly than ever before.
Nevertheless, the traditional lenders continue to have a significant role to play, whether in refinancing situations, or where deals are not necessarily time sensitive.
The continued burden of capital adequacy regulations in the mainstream banking sector is likely to increase the attractiveness of more agile lenders in certain situations.
Two-speed market
What is clear is that we are seeing the emergence of a two-speed market, largely fuelled by an increasing number of property investors willing to compromise on cost of capital in return for certainty and speed of execution.
Most debt funds and challenger banks work to their own bespoke short-form loan templates, which can save considerable time and cost compared with the more traditional, institutional LMA documents.
With the number of new entrants, the debt market is rapidly becoming more competitive and complex. Lenders are having to differentiate themselves through pricing, sector or niche focus and creative structuring.
For the savvy property investor this means there are many more borrowing options available than ever before.
But more options doesn’t necessarily help us make a better choice; especially in a world of instant gratification, where pressure to act quickly increases the chances of choosing the wrong option.
A decision from a lender may well arrive almost as quickly as your Hawaiian Poke or Chicken Ramen form Just Eat but it’s still best to ask advice and read the menu fully before you order.
Debt advisor and asset manager BBS Capital had a record-breaking year in 2017, arranging loans of more than £650m (€732m) across 44 transactions with a property value of £1.1bn.
BBS Capital completed the deals across multiple countries and property sectors, working with 26 different clients and 17 different lenders.
“We are in an environment with an increasing number of lenders with different specialities,” BBS Capital’s co-founder Adam Buchler said. “The market has therefore become more advisor-led, and investors are increasingly turning to trusted intermediaries to help them navigate the market.”
According to BBS, all the signs point to a promising 2018 as well. Earlier this month the adviser arranged two facilities totalling £42.5m with Titlestone Structured Finance and Shawbrook Bank, for the acquisition of a major permitted development deal in London’s Uxbridge.
BBS Capital also recently arranged a €50m facility with Signal Capital Partners, for the acquisition and development of Orquidea Aparthotel, a 12,000 sq m hotel in the exclusive town of Santa Eulalia on the island of Ibiza.
REC AWARDS 2017: BBS wins debt advisor of the year
DEBT ADVISOR OF THE YEAR
WINNER: BBS Capital
While BBS Capital may operate on a smaller scale than the market’s largest real estate debt advisory shops, it was prolific during 2017. In total, the London-based firm arranged £650 million (€734 million) across 44 transactions with a total property value of around £1.1 billion. The boutique firm has been active for around 15 years. “I’ve never seen a market that is this advisory-friendly,” says the firm’s co-founder Adam Buchler.
“The UK market is becoming increasingly advisor-led, gradually following the US model. There is a greater need for investors to use intermediaries to help navigate a market with an increasing number of lenders with different specialities.
“A quality advisor will know who can deliver what terms in which timeframe to optimise the client’s positions.”
The BBS client base is weighted towards private clients including family offices and property companies, although it does have institutional clients.
“Our typical client uses us as an extension of their finance team. We co-ordinate with their in-house team and external professionals to ensure a seemless process,” says Buchler.
Most of its business is in the UK market, although 2017 also saw deals in Germany and Spain. In total, it sourced debt from 15 lenders, ranging from UK clearers to niche non-bank players, of which six were new to the firm. Deals ranged from investment deals on prime property to subtwo-year bridge financings.
“We saw a marked increase in the volume of short-term loans that we arranged, ref lecting market conditions where speed
of performance is paramount.”
Israeli private buyer snaps up £43m office campus for resi conversion
An Israeli private investor has acquired a 148,000 sq ft office campus in Uxbridge for £43m and plans to convert it into flats.
The investor, advised by BBS Capital, has also secured loan facilities totalling £42.5m from Titlestone Structured Finance and Shawbrook Bank to help fund the acquisition and redevelopment plans.
The West London office campus, which was previously owned by Legal & General, comprises three buildings, which the new owner plans to turn into 237 flats under permitted development rights (PDR).
Following the financing deal, conversion of one of the buildings, Bridge House, totalling 79,459 sq ft, will start immediately. The remaining two buildings, Waterside and Riverside, comprising about 34,000 sq ft each, are let to Xerox until 2020, so their redevelopment will be delayed until then.
For Bridge House, BBS Capital worked with the borrower to secure a £28.5m development loan with Titlestone Structured Finance, at 60% LTV, for a term of 2 years.
For the other two building, Waterside and Riverview, a £14m facility was arranged with Shawbrook Bank at 70% LTV, for a term of two years, to bridge the period until redevelopment works can begin.
Westley Richards of BBS Capital said the firm “had to be creative to structure the deal” because of the different timings of the redevelopment plans.
Simon Dekker relationship director at Titlestone said: “This was an attractive scheme but required strong focus from all parties to be able to meet the timescale of 6 weeks from first meeting to completion.”
The Israeli investor behind the deal also purchased a 170,320 sq ft West London office portfolio at the end of last year, which included Sky’s former HQ, for conversion into residential under PDR. On that occasion, the BBS Capital client secured a £31.3m loan from Octopus Property.
BBS Capital, the debt advisor and asset manager, has arranged, on behalf of a private hotel group, a €50m facility with Signal Capital Partners, for the acquisition and development of Orquidea Aparthotel, a circa 12,000 sq m hotel in the exclusive town of Santa Eulalia on the island of Ibiza.
The loan was used to purchase the 198 room hotel from a private vendor, with the remainder of the facility being used to fund the redevelopment of the seven-storey building into a luxury branded resort and beach club, set to open in summer 2019.
Redevelopment of the hotel is expected to begin immediately.
It is situated in a prime location on Santa Eulalia’s palm tree lined promenade, which runs along the town’s beach. Santa Eulalia is on Ibiza’s east coast, just 21km from Ibiza Airport and has a long established reputation as the island’s cultural and gastronomic capital. The town also has Ibiza’s largest marina with moorings for over 700 boats.
Joanne Barnett, of BBS Capital, said: “We are delighted to have helped our client secure such a prime development opportunity in Santa Eulalia. It was a complex transaction for an asset located on an island that is fast becoming a luxurious international entertainment destination.
“It was important to our client that the deal was completed quickly so redevelopment work could begin immediately and outside of the tourist season. Signal Capital Partners were able to quickly overcome the deal’s challenges, ensuring it progressed swiftly and the completion date was met.”
2017 has been an exciting time for fast growing BBS Capital, having helped its clients finance over £1bn of property deals across multiple sectors in the past 12 months.
One of its notable deals was arranging the acquisition finance for WeWork’s Fox Court building in Grays Inn Road, London that was acquired in March 2017 by a private client for in excess of £100m. The Mayfair based firm operates in the UK and Western Europe with an experienced and specialist team.
Niche UK lender Octopus Property has provided a £31.3 million short-term loan to fund the purchase of a London office portfolio ahead of its conversion into apartments.
The acquisition facility, arranged by debt advisory firm BBS Capital for a private property company, has a loan-to-value ratio of 65 percent. The facility is understood to have a term of six months.
The loan will be used to fund the £48.15 million acquisition of an office portfolio in Brentford, west London, from Columbia Threadneedle Investments. The portfolio comprises more than 170,320 square feet, of which there is consent, under permitted development rules, to convert 140,248 square feet into 268 studios and one- and two-bed residential apartments.
The portfolio includes New Horizons Court, a 140,248-square-foot office campus spread across four buildings, as well as three additional office buildings known as The Courtyard Buildings, providing a further 30,072 square feet of space.
Conversion of the properties is expected to begin immediately.
The deal was arranged in just two weeks, according to Westley Richards, of BBS Capital, adding that it has closed £100 million of financing deals with Octopus this year.
“This facility represents the largest of its kind we have done this year, reflecting both the robustness of the market and our position as the first-choice lender for real estate professionals seeking fast and flexible financing for a diverse range of residential and commercial projects,” said Mario Berti, chief executive officer of Octopus Property.
In September, Octopus held a £115 million first close on its Commercial Real Estate Debt Fund II, which will provide property loans with terms as short as three months in the UK real estate market. It is targeting £200 million, with a final close expected in March 2018.
Octopus, formerly known as Dragonfly Property Finance, estimates that would enable it to lend more than £500 million in the next three years.
Its predecessor fund, which has reached the end of its investment period, generated a gross IRR of 12.6 percent to June 2017, and the second is understood to be targeting returns not significantly below that mark.
BBS arranges €50m for luxury hotel development on Ibiza
BBS Capital, the debt advisor and asset manager, has arranged a €50 mln financing facility for the acquisition and development of 12,000 m2 Orquidea Aparthotel in Santa Eulalia on the island of Ibiza.
BBS secured the loan on behalf of a private hotel group from Signal Capital Partners, a London-based private asset management firm focused on investments in the European credit and real estate markets.
The loan was utilised to purchase a 198-room hotel from a private vendor, with the remainder of the facility being used to fund the transformation of this 7-storey building into a luxury-branded resort and beach club, set to open in summer 2019.
Redevelopment of the hotel is expected to begin immediately. It is situated in a prime location on Santa Eulalia’s palm tree lined promenade. Santa Eulalia is on Ibiza’s east coast, 21km from Ibiza Airport and has a long established reputation as the island’s cultural and gastronomic capital. The town also has Ibiza’s largest marina with moorings for over 700 boats.
Joanne Barnett, of BBS Capital commented: ‘We are delighted to have helped our client secure such a prime development opportunity in Santa Eulalia. It was a complex transaction for an asset located on an island that is fast becoming a luxurious international entertainment destination.’
‘It was important to our client that the deal was completed quickly so redevelopment work could begin immediately and outside of the tourist season. Signal Capital Partners were able to quickly overcome the deal’s challenges, ensuring it progressed swiftly and the completion date was met,’ Barnett added.
BBS Capital has helped its clients finance over £1 bn (€1.1 bn) of property deals across multiple sectors in the past 12 months. One of its notable deals was arranging the acquisition finance for WeWork’s Fox Court building in Grays Inn Road, London that was acquired in March 2017 by a private client for in excess of £100 mln.
The London Mayfair-based firm operates in the UK and Western Europe with an experienced and specialist team.
Debt advisor and asset manager BBS Capital said it has arranged a £31.3 mln (€35 mln) facility with specialist property lender Octopus Property, for the acquisition of one of London’s largest ever permitted development deals by floor area.
The buyer, a private client of BBS, has purchased a 170,320 sq ft (13,000 m2) office portfolio in Brentford, West London, from Columbia Threadneedle Investments, for £48 mln.
A vast majority of the portfolio (140,248 sq ft) has consent for change of use into 268 studios and one and two bed residential apartments.
The portfolio includes New Horizons Court, a 140,248 sq ft office campus spread across four buildings, including Sky’s former HQ, as well as three additional office buildings known as The Courtyard Buildings, providing a further 30,072 sq ft of space.
Conversion of the properties is expected to begin immediately.
BBS Capital arranged the acquisition facility with Octopus Property at a loan to value of 65%.
Westley Richards, of BBS Capital commented: ‘We had only two weeks to arrange this facility, and are delighted to have successfully enabled our client secure this exciting opportunity. This deal takes our total loans financed with Octopus to over £100 mln in 2017 alone.’
Recent deals financed by London-based BBS include an acquisition loan for WeWork’s Fox Court building in Grays Inn Road that was acquired in March 2017 by a private client for over £100 mln.
Mario Berti, CEO of Octopus Property, added: ‘This facility represents the largest of its kind we have done this year, reflecting both the robustness of market and our position as the first choice lender for real estate professionals seeking fast and flexible financing.’
Savills acted for Columbia Threadneedle Investments and Finn & Co advised the buyer. Howard Kennedy acted on behalf of Octopus Property.
BBS Capital secures loan for London’s largest PDR development
A client of BBS Capital has secured a £31.3m debt facility with Octopus Property to fund the acquisition of one of London’s largest ever permitted development deals by floor area.
The buyer has purchased a 170,320 sq ft office portfolio that includes New Horizons Court, a complex of four buildings including Sky’s former HQ, in Brentford, West London, from Columbia Threadneedle Investments, for £48.15m.
Some 140,248 sq ft of the portfolio has consent, under permitted development, for change of use into 268 studios and one and two bed residential apartments.
BBS Capital arranged the acquisition facility with Octopus Property at 65% LTV.
Westley Richards, of BBS Capital, said: “We had only two weeks to arrange this facility, and are delighted to have successfully enabled our client secure this exciting opportunity.”
Mario Berti, chief executive of Octopus Property, added: “This facility represents the largest of its kind we have done this year, reflecting both the robustness of market and our position as the first choice lender for real estate professionals seeking fast and flexible financing for a diverse range of residential and commercial projects.”
Savills acted for Columbia Threadneedle Investments and Finn & Co advised the buyer.
PGIM Real Estate Finance has provided a £50.1m loan to the private Middle Eastern investor which acquired Fox Court, a 103,555 sq ft office property in Central London’s Midtown.
The loan reflects a 49.38% LTV on the £101.45m purchase price, which reflected a capital value of £979.67 per sq ft.
PGIM Real Estate Finance, among the largest commercial mortgage lenders in the United States, is a business of PGIM, the $1 trillion global investment management business of U.S.-based Prudential Financial, Inc.
The 15-year loan helped to finance the acquisition of the building that counts WeWork as its main tenant. Built in 1976, the building has seen two major refurbishments since its opening, most recently in 2015 when WeWork took occupation. WeWork is a market-leading provider of shared workspace and services for more than 90,000 members around the world.
“The growing demand for flexible space provides an interesting opportunity to finance a non-traditional office sector, particularly as PGIM continues to expand its debt offering,” said Aaron Knight, a director with PGIM’s London office who led the debt transaction. “Given the improvements in the variety and quality of office space available, we expect Midtown to withstand any potential Brexit impact because of its diverse tenant mix, which also has strong ties to the resilient legal profession.”
The Midtown area has historically been a hub for law firms and the legal profession. However, a recent shift in occupier trends has brought technology and financial firms to the area and led to a more diverse range of office tenants. Fox Court is also set to benefit from nearby infrastructure projects, such as the development of London’s Crossrail, which should improve connectivity to the area as phased operations begin from late 2017.
“Our decision to proceed with PGIM for this financing was justified by the smooth and efficient process from start to finish that enabled our client to complete within the targeted timeframe and on very competitive terms,” said Adam Buchler, a principal with Buchler Barnett Spencer who advised the sponsor on the transaction.
“This transaction is an example of increasing demand in the market for core plus and value add properties,” said Bryan McDonnell, a principal with PGIM’s London office. “Borrowers who are faced with high single tenant concentrations and near term lease roll, or those seeking higher whole loan leverage, are looking beyond the typical core lending market.”
Octopus Property today announced it has completed an urgent commercial bridging loan to facilitate the acquisition of a £24m office building within just four working days.
The enquiry was received by Justin Cooper from Westley Richards of Buchler Barnett Spencer late last Wednesday, at which point the team began underwriting the deal before instructing Steve Clinning of Howard Kennedy Solicitors early on Thursday morning.
Thanks to the collaborative efforts of Octopus Property’s Sales, Commercial and Credit teams, and all those in the Howard Kennedy legal team, the loan was completed by 3.20pm the following Tuesday, just 4 working days after the Application Form and KYC documents arrived.
Ludo Mackenzie, Head of Commercial Property at Octopus commented:
“This was a classic Octopus Property deal – tight timeframe, complex structure and large lot size. Buchler Barnett Spencer are an established introducer of high quality loan requirements to Octopus, so it was extremely satisfying to complete this deal with them.”
Steve Clinning, Head of Banking and Asset Finance at Howard Kennedy, added:
“The long standing relationship between the teams at Octopus and Howard Kennedy meant that all potential issues were identified and resolved early, making the process seamless with the deadline for completion being met with relative comfort.”
Westley Richards of Buchler Barnett Spencer, commented:
“There really aren’t many lenders who can turn around deals like this. We’ve worked with both Octopus Property and Howard Kennedy for many years and knew that when they gave their commitment, they would work together to ensure the loan was delivered.”
