Blueprint: SVB’s purchase abates Deutsche Bank’s troubles, Starwood’s Sternlicht criticizes rate hikes, ESR’s divestment plans

They said it

“I do think traditional office is much worse in the US than people think, and I think a lot of firms have not been aggressive enough on their marks”

Joan Solotar, Blackstone‘s global head of private wealth solutions, speaks on Bloomberg TV regarding pain office owners are likely to face as repricing continues

What’s new?

A little calmer: the US operations of Silicon Valley Bank finally found a buyer in First Citizens (Source: SVB)

Last week, as Frankfurt-based Deutsche Bank’s share price plummeted as much as 15 percent in three days, the banking system braced for what could have been the biggest domino to fall in an already uncertain period. The notion that Germany’s biggest commercial real estate lender – with a €33 billion commercial real estate loan book – could be the latest institution needing to be rescued after the failings of three regional banks in the US this month, saw its stock owners running for the hills. Such fears were exacerbated by Credit Suisse running into trouble before being bought by Swiss rival UBS just days prior.

However, fears have subsided with the reported acquisition of one of the three US regional banks, Silicon Valley Bank, by First Citizens Bancshares, one of the US’s largest regional banks. The deal, expected to see First Citizens take control of $56.5 billion in deposits and $72 billion of SVB’s loans at a steep discount, has created a short but welcome sigh of relief for the financial markets. Indeed, Deutsche’s share price rebounded 6 percent over the weekend as the SVB news unfolded. Share prices of regional banks in the US that had been affected, including First Republic, also have rebounded.

A Sternlicht warning
Barry Sternlicht had harsh words for the Federal Reserve, following the central bank’s decision to raise the federal funds rate by 25 basis points last week. “By raising interest rates yesterday, they’re only increasing the losses for the regional banks, which means they’re still going to have to go and borrow additional capital from the Fed,” he said an interview with CNBC’s Squawk Box last week.

The Starwood Capital Group chairman added that it will be difficult for large money-center banks like JPMorgan and Bank of America to replace regional banks – which account for the majority of commercial real estate loan originations – given their own exposure limits to commercial real estate.

“I just wonder who on earth is going to refinance that office building on Park Avenue,” Sternlicht said. “And I think if you take that to its logical conclusion, values will drop.” That in turn will have devastating consequences for municipalities that rely on tax receipts from real estate to pay for their services. “You do not have to see the car hit the wall to know that it’s going 8,000 miles an hour and that it will hit the wall,” he concluded.

ESR to divest non-core business
Hong Kong-based industrial heavyweight ESR plans to divest up to $750 million of its non-core business as it streamlines its structure following the acquisition of multi-asset manager ARA Asset Management last year. According to its annual results announcement last week, the firm has identified its stake in Cromwell Property Group as well as shares of some real estate investment trust holdings as potential sale targets.

ESR has already started the process, having sold its 18.16 percent interest in China Logistics Property Holdings for $350 million in May last year. “This is an important exercise for the group, but it’s also important to note that these types of divestments may take time in order to achieve the right outcome for each,” Jeffrey Perlman, chairman at ESR, said during the results presentation. Read our full coverage here.

Trending topics

Another exit route for BREIT investors
Investors in Blackstone’s Blackstone Real Estate Income Trust now have another liquidity option. Class D shares of BREIT began selling on LODAS Markets, an online secondaries marketplace, last week at $14.42, equal to BREIT’s January net asset value and slightly below the February NAV of $14.47, according to LODAS chief executive Brian King. The initial sales of BREIT shares on the platform follows the start of trading for SREIT last month.

“In both BREIT and Starwood REIT, we’re attracting institutional buyers that have designated millions of dollars to these funds. It’s a significant opportunity for liquidity for investors who don’t want to wait another month to test their luck in redemption queues,” King said.

BREIT’s redemption limit rules for its $70 billion NAV non-traded real estate investment trust were activated when exit requests exceeded both the monthly and quarterly NAV limits in December. Subsequently, the firm paid $1.4 billion in redemptions out of a total $3.9 billion in repurchase requests in February, according to the firm’s March notice to stockholders.

Lend to you to buy from me
Dealflow dried up in the latter half of last year as rates climbed to historic highs and banks tightened lending requirements. For a growing proportion of deals that did get done, however, a traditional lender was conspicuously absent. According to a Capital Trends research briefing by MSCI, seller financing accounted for 0.8 percent of all commercial real estate financing in the US in H2 2022, up from 0.4 percent in H1.

While this increase appears small, sellers were issuing larger amounts of credit. Loans of at least $50 million in size accounted for 32 percent of all financing during the year. By comparison, seller financings represented 0.8 percent of activity in 2019, but only 16 percent of loans that year were $50 million or larger. While seller financing levels are still some way off the 4.6 percent recorded in 2008, the recent furore in the banking sector could see it rise further yet.

Clarion’s UK logistics re-entry
Long-term demand for logistics has done little to stop investors from applying the brakes, spooked by rental growth not outpacing today’s escalating cost of finance capital. According to global broker CBRE, only £1 billion ($1.23 billion; €1.14 billion) of logistics properties traded hands in Q4, 2022, bringing the annual total to £10.3 billion, down 35 percent on 2021. Such a malaise has made any strategic pivots in the sector more interesting.

Take logistics manager Clarion Partners Europe, for instance. The firm has chosen now to return to the UK after a nine-year absence, acquiring 438,400 square feet across two warehouses in Peterborough in a deal valued at £52 million. The transaction reflected a yield of 4.49 percent, according to a report by South African news service Property Flash. In a statement, the firm extolled the virtues of buying back in when low vacancy rates are a prevailing factor, thanks to a “speculative development pipeline subdued due to ongoing inflationary pressures and rising financing costs.”

Data snapshot

Industry standards
Industrial is by far the most sought-after asset class for investors, according to global advisory Lazard’s latest data. Residential, meanwhile, has dropped off in terms of favorability, with investors seeking alternatives or debt strategies instead, given the market volatility.


AEW begins Asia succession plan
Boston-based AEW has made a senior management change in Asia-Pacific as the firm thinks about its succession plan in the region. AEW’s long-serving Asia chief executive David Schaefer [his LinkedIn here] is moving to a chairperson role in the region. Schaefer, who has been in the head role since 2012, will gradually hand over his leadership responsibilities to the firm’s current Asia chief investment officer Jason Lee [his LinkedIn here].

Meanwhile, Lee will continue to lead investments for the AEW Value Investors Asia fund series and remain as the senior portfolio manager for the funds. Schaefer and Lee joined AEW together in 2012 from DTZ Investment and Asset Management. The two have grown the AEW Asia team from 15 people to around 50 people. Read our full coverage here.

Investor watch

The geothermal heat is on
One New York development is bringing a bit of Australian heat to the Big Apple. Construction continues at 1 Java Street in Brooklyn, New York, which is 90 percent owned by a joint venture between superannuation fund Aware Super and Sydney-headquartered real estate company Lendlease, but the project has been awarded $4 million in funding to build an innovative geothermal heating system. The competitive grant came from the New York State Energy Research and Development Authority, which says 1 Java Street will be the largest multifamily project in New York State to use a geothermal heat exchange system upon completion in late 2025. The all-electric technology is expected to reduce carbon emissions from heating and cooling by 53 percent versus standard methods for residential buildings. 1 Java Street is the sixth project in the venture’s Americas multifamily portfolio, which achieved net-zero carbon in 2021.

This week’s investor meetings

Tuesday, March 28

Wednesday, March 29

Thursday, March 30

Friday, March 31

Today’s letter was prepared by Peter Benson with Jonathan Brasse, Evelyn Lee, Charlotte D’Souza and Christie Ou contributing