Blueprint: ECB repeats concerns about commercial real estate’s impact on banks, London office market produces more negative headlines, Coima brings aboard GIC for ‘brown-to-green’ strategy

With the US celebrating Thanksgiving, PERE's attention has been dominated by events in Europe, with the European Central Bank repeating concerns over the indebtedness of the commercial real estate sector; the office malaise in London leading to further headlines about building loan sales at a discount; important tenants undertaking strategic reviews about reducing their workplace footprints; and more besides in today's briefing, exclusively for our valued subscribers.

-

They said it

“The deal business is not totally in mothballs and these things start again”

Blackstone chairman and chief executive officer Stephen Schwarzman told Bloomberg TV yesterday the New York-based mega-manager had agreed large real estate deals in both Europe and the US in recent weeks.

What’s new

ECB: in its second report of the year the central bank repeated concerns over the resilience of banks’ loan books, with real estate losses potentially making an ‘adverse scenario’ worse.(Image: Getty)

ECB gets real on real estate

Fears of contagion in the banking system from a collapse in real estate values, which have been rumbling for most of this year, have been stoked yet again by the European Central Bank’s latest assessment. In its twice-yearly Financial Stability Review published last week, the ECB wrote “real estate firms are vulnerable to losses in the current environment, with consequences for the resilience of banks’ loan books.” Large losses for real estate firms could also “significantly amplify an adverse scenario” and lead to “systemically relevant losses being incurred in the banking system.” Investment funds and insurers could subsequently be impacted, wrote the bank.

But the grave tone of the ECB’s announcement contrasts with the Bank of England’s assessment last month, which focused more on problems in China’s property market than in the UK. It also suggests a fear greater than what real estate firms themselves may be feeling. Indeed, when speaking with affiliate title Real Estate Capital Europe in the summer, industry commentators were keen to draw a distinct line between the possibility of contagion in the US, where regional banks are highly exposed to commercial real estate and office vacancy rates are disproportionately high, and Europe, where the real estate lending pool is more nuanced and diversified among institution types.

Aiming for the Starz 

Despite 2023 proving tricky for managers with credit strategies to plug the refinancing gap, one opinion gaining traction as the year rounds out is that banks, in light of more clarity on interest rates, are starting to apply pressure on borrowers to find new lenders or sell assets. With this in mind, news on November 22 that Abu Dhabi’s sovereign wealth fund Mubadala Investment Company has contributed an undisclosed amount of anchor capital to mid-market lender Starz Real Estate’s latest debt fund looks nicely timed.

The Starz Orion Capital fund will be used to target senior, mezzanine, bridge and non-performing loan opportunities. Loans of between €30 million and €60 million in size are expected to be issued from the vehicle. The London-headquartered manager will top up Mubadala’s commitment, giving it total funds of €300 million to deploy. Depicting the opportunity ahead, Starz’s director Alexandre Bretz told affiliate title Real Estate Capital Europe in October: “Valuers are lowering values by 10 percent but on certain assets that should be between 25-30 percent, and that is not just down to interest rate rises but because of dramatic changes in the way real estate is used.”

WeWork-anchored city office loan for the chop

A combination of a maligned sector and a faltering tenant has led the lender on one of London’s most recognizable buildings to wave a white flag. A loan secured against the WeWork-anchored 1 Poultry London office building is being sold at a discount amid hiked interest rates and the flexible office provider’s filing for bankruptcy, according to Bloomberg.

The news and data service reported how the loan’s originator, Dublin-based Bank of Ireland, is seeking bids for a £104 million ($131 million; €120 million) loan to Hana Alternative Asset Management, the South Korean investment firm that owns the building. It is understood the bank has appointed adviser Eastdil Secured to lead the offload process. Hana acquired the asset in 2018 for £182 million, but the asset was valued at £142.4 million in 2020, breaching the terms of the bank’s loan and forcing Hana to inject fresh capital. The valuation has since fallen further, Bloomberg wrote.

Trending topics

Women in Real Estate

Rounding out our conference calendar in 2023, PERE journalists will be attending and moderating sessions at affiliate title Private Equity International’s annual Women in Private Markets Summit in London. The two-day event includes an afternoon dedicated to thought leadership on today’s pertinent real estate matters from senior female executives of institutional investors, managers and their advisers. Joining the agenda will be leaders from organizations including CPPIB, Cadillac Fairview, Manulife, Patrizia, Ardian, LGIM Real Assets, Barings, Slate Asset Management and Morgan Stanley Real Estate Investing. Real estate debt, decarbonization and the future of offices are among the topics scheduled to be scrutinized onstage.

GIC sees value in brown-to-green

The concept of adding value to real estate needs as much help as it can get in today’s depreciating market. For a growing tranche of managers – particularly those investing in Europe – this means buying up assets with poor sustainability performance and investing capex to transition them into energy-efficient buildings, hedging value bets on the importance of sustainability and ESG to tenants, users and, increasingly, institutional investors.

One such institution backing this thesis is Singaporean sovereign wealth fund GIC, which has committed €200 million to anchor Milan-based manager Coima’s latest opportunistic real estate fund, as reported by PERE. Coima Opportunity Fund III, for which the manager is looking to raise €500 million, will redevelop and retrofit office and residential assets across Italian cities, targeting LEED certification for all buildings. Coima’s fund becomes the sixth exclusively brown-to-green real estate fund launched this year, by PERE’s count. Although all bar one of these are focused on Europe, the concept of buying ‘brown’ and selling ‘green’ is gathering momentum among investors searching for conviction in a dislocated market.

Less in London

London’s office availability has reached its highest level since 2004, now equalling approximately 25 million square feet of vacant space, according to data released earlier this month by occupier-focused broker Devono.

Consultancy Ernst & Young could well be the latest big-name tenant to add significant square feet to that total should it vacate the approximate 350,000 square feet it occupies at its long-standing headquarters at More London, on the fringe of the City. According to a Telegraph report (subscription required), the Big Four auditor is contemplating a downsize when its 25-year lease expires in 2028, joining other large occupiers in the city that have chosen to do likewise, including technology giant Meta, bank HSBC and law firms Clifford Chance and Dentons. Like them, EY’s footprint review is a reaction to increasing work-from-home requirements from staff as well as a bid to reduce its carbon emissions, the report said.

Data snapshot

Offices in European cities show resilience

The return of employees to the office is a bifurcated affair. In European CBDs, office vacancy rates are considerably lower than in key US cities, as shown in manager M&G’s latest Global Real Estate Outlook report.

People

Ventures in Asia-Pacific

London-based proptech investment firm Pi Labs has set its sights on Asia-Pacific, hoping the appetite for digitalization and innovation among the region’s property firms will give its European investee companies a boost. As revealed by PERE, the firm has opened a satellite office in Hong Kong and hired Akina Ho, a real estate and technology professional with more than 20 years’ experience, as an adviser to oversee relationships between portfolio companies and their customers in the region.

In addition to helping proptech ventures expand, Ho, who previously helped to build the venture capital arm at Hong Kong-listed real estate company Great Eagle Holdings, will look to build more relationships with strategic and institutional capital in Asia. At a time when the general direction of travel for Western businesses in Hong Kong is outward, rather than inward, Pi Labs’ founder Faisal Butt has seen a “very buoyant mood” in the local market, an “eagerness to do business and to transact and invest and deploy” in the aftermath of one of the longest covid lockdowns of any major global city.

Investor watch

A Super boost for UK real estate

Aware Super, Australia’s third-largest superannuation fund, has outlined key details of its plan to expand its overseas exposure to real estate. Speaking with PERE at the investor’s newly opened office in London last week, Damien Webb, deputy chief investment officer and head of international at the A$160 billion ($105 billion; €96 billion) superannuation fund, said the fund is under-allocated to private markets, of which real estate has the most headroom for growth. The fund has earmarked A$10 billion to be invested across private markets out of the London office, with A$3.5 billion inked for real estate.

As it looks to build up its UK and Europe real estate books, Webb said the investor is predominantly looking to make direct or semi-direct acquisitions of operating platforms in property and grow them organically or through mergers and acquisitions. Another aim for the pension fund’s European business is to set up an in-house platform via which it can invest directly in single assets across other sectors. “We like to partner with like-minded institutional managers and developers,” said Webb. “Learning from other groups is important in a new market.” Read more in PERE’s latest analysis.

This week’s investor meetings

Monday, November 27

Tuesday, November 28

Wednesday, November 29

Thursday, November 30

Friday, December 1

Today’s letter was prepared by Jonathan Brasse, with Charlotte D’Souza, Lucy Scott and Mark Mwaungulu contributing