Wells Fargo, one of the oldest corporations in the US, is doing something new in the UK – lending in the commercial real estate market.
The financial services giant was started in 1852 and nowadays is the largest real estate lender in the US with approximately $120 billion in commercial real estate loans on its balance sheet. In US banking parlance, it has an ‘end-to-end’ platform providing loans from the most senior to junior tranches.
In the wake of Lehman Brothers’ collapse, it took its chances by taking over Wachovia Financial towards the end of that manic year, 2008. Up until that point, Wells Fargo principally was a lender on the West Coast of America – it was a very large real estate bank, but principally a balance sheet lender.
While it did have a CMBS programme, it wasn’t a major player. It found the market too crowded, and it didn’t have a deep bench in the back office to make an impact anyway. All that changed with the big merger with Wachovia because the latter was preeminent in CMBS. The funny thing is, Wells Fargo took over Wachovia at a time when the CBMS market went away.
Since then, a new version of CMBS has emerged in the US called CMBS 2.0 (see page 14), and Wells Fargo is a principal player in that arena. So, almost by default, the bank has become the biggest player in commercial real estate lending, including securitisation. It also probably has the biggest supply to this day of loans that were securitised and are now distressed – loans that are spread far and wide. For example, in Germany it owns almost €1 billion of soured loans from Wachovia’s old book, which it is in the process of working through.
I mention all this because Charles Fedelan, executive vice president and head of Wells Fargo’s commercial real estate institutional and metro markets group, was present at the EXPO REAL tradeshow in Munich last month. What he had to say was interesting as a pointer to other US real estate lending banks and made one believe that somehow, gradually, established US lenders might step in to play a significant part in filling the financing void left by European banks.
So, it might not be just the alternative financiers such as private equity funds, insurance companies, pension plans and asset managers coming into the space. If that is indeed the case, it has to be a welcome development for private equity real estate firms that face the daunting prospect of having to operate in a shallow capital market that clearly hampers their business programmes.
Wells Fargo, said Fedelan, started lending in the UK earlier this year, and there are now some public examples available. For instance, in the last few weeks, it has emerged that Wells Fargo led a banking consortium in providing a £150 million (€185 million; $240 million), five-year senior loan to Brookfield Office Properties to buy a London office at 99 Bishopsgate. It is thought to be providing a loan of 55 percent on a loan-to-value basis.
Interestingly, while 99 Bishopsgate is obviously a good quality building in a prime London location, there is a degree of vacancy at the office. Some 31,500 square metres is vacant following a decision by Deutsche Bank to relocate in 2011. In other words, there is leasing risk, but clearly Wells Fargo and the two other banks in the consortium (Aareal Bank and Banco Santander) were able to price that into their loan.
Other deals Wells Fargo has done include the refinancing of 123 Buckingham Palace Road in London’s Victoria neighbourhood for none other than Westbrook Capital – evidence that the presence of Wells Fargo in the UK is helping US private equity real estate firms. Surely, it bodes well that its programme is not just for core property buyers looking for low leverage.
At EXPO REAL, Fedalen suggested that returns on bank loans made in the US simply won’t look as attractive as they did before. As third quarter US earnings results suggest, net interest margins for all the major banks seem to be compressed. In other words, the difference between what a bank makes on loans and what it pays to use the funds itself is narrowing. Apparently, that margin is tightening by between 100 basis points and 125 basis points.
Given that margins are shrinking, there is a clear incentive for banks to look to other markets outside the US in order to improve performance, which helps explain Wells Fargo’s desire to expand outside of the US. Fedalen confirmed there was no reason to suppose that commercial real estate lending in the US would suddenly reverse course. However, with the market becoming increasingly more liquid and, consequently, competitive, there is a solid reason to expand elsewhere.
Fedalen also suggested that one could expect a wash of other US lenders in Europe to follow suit. What Wells Fargo is doing has parallels with Citi, Bank of America and Goldman Sachs, both of which seem able and willing to lend to UK real estate as well. Such an influx of financing would be most welcome.