Debt opportunity coming from new loans, not restructuring, lenders say

The covid-era European real estate finance market is generating attractive origination opportunities, particularly for lenders willing to take on refurbishment or redevelopment risk, according to panelists at PERE‘s Debt & Financing Forum, hosted in London last week.

Debt specialists speaking at the event also argued that distressed situations remain relatively rare despite the turmoil of the past 18 months, giving those debt providers with an appetite to lend the capacity to seek out new deals.

Laia Massague, principal at StepStone Group, said the capital manager, which focuses on higher-yielding lending opportunities, has seen ample opportunity to write new loans this year.

“We had expected to see a lot more restructuring,” she said. “It is much more about new originations, new acquisitions and refinancing in our pipeline. A lot of our capital is for co-investment, and we have seen a huge increase in volume because smaller managers are getting some of the bigger deals that would otherwise have been done by the banks.”

Massague said StepStone likes operational real estate and development schemes. “We think you’re getting overpaid for that last part of the capital stack, where a lot of banks cut off,” she explained.

Michael Shields, EMEA head of real estate at ING, also said the Dutch bank has spent little time on restructuring activity. “We expected to see a lot more distress in the beginning. The loan-to-value on our retail book was so low that, yes, there were some covenant waivers early on, but now we only have one retail loan that is not performing, across a sizeable book. We have a covid forum where we assess covenant waivers, and we haven’t had a deal in there for three months.”

Shields added the pipeline of loan deals has been healthy. “We have been doing all different types of lending – on logistics and residential mainly. We are selective on office but are still doing it. We are not looking to expand the retail part of our book for now. And we have been doing some alternatives, looking at some life sciences, senior housing, student housing deals.”

Panellists agreed the residential sector, including the UK’s burgeoning build-to-rent sector, represents attractive lending business. Craig Prosser, head of UK property finance origination at LBBW, said the German-headquartered bank is keen to grow its lending exposure to build-to-rent residential in the UK. “We are a big lender to multifamily in the US and Germany, but we are scratching the surface of where we would like to be in the UK.”

Part of the reason, Prosser explained, is the lack of completed BTR product in the UK market. “It is very much a development lenders’ product at the moment, and many banks in the UK find it a challenge to allocate into this area because of the lack of stabilized product. It is possible to deploy capital on the development side, so we are looking closely at that part of the market.”

Shields agreed exploring residential markets is a good way to source deals in a market in which many lenders are focused on logistics. “The US, Netherlands, Germany are the big markets for residential and you can get volumes there. But we are seeing some big players going into Central and Eastern Europe, so big institutional players are trying to kick-start this for-rent residential market in countries that haven’t had it. We need that. Banks need it, investors need it. Because everyone piling into logistics is not healthy, I think.”

Development route

Panellists agreed lending against assets that are subject to transitional business plans, as well as new developments, is increasingly attractive in today’s market. Lennart van Mierlo, head of commercial real estate debt at NN Investment Partners, said the Dutch investment manager typically focuses on lending against stabilized, income-producing assets, but sees the sense in lending against assets subject to upgrade plans.

“We do sometimes see refurbishment angles to get more resilient, future-proofed assets. It is becoming more and more important. Capex should be reserved for that, so we are okay to have an element [of refurbishment] as part of the investment. Assets which are already cash-generating assets, but with a small refurbishment angle are perfect for us,” he commented.

Prosser believes backing development schemes can be good business, including for offices. “There has been a paucity of development finance opportunities in London because of a pause on construction starts since Brexit, which explains why the City of London market is healthy. It’s an attractive proposition from a risk-return perspective.”