In January, Wells Fargo, the largest commercial real estate lender in the US, announced it was expanding its financing services in the UK. As part of the expansion, Robert Maddox and Cullen Powell – formerly with the bank’s commercial real estate institutional metro markets group in southern California – have relocated to London to join Jimmy Gray, who already was in London leading the UK real estate effort and now becomes the office’s senior credit officer. The bank also is expected to select a new real estate head for the office shortly.
Despite that bit of welcome news, there are not yet many US banks that have started or restarted UK commercial real estate lending operations. Indeed, they can be counted on the fingers of one hand, with Goldman Sachs and Citigroup clearly two that have been lending to opportunistic buyers of real estate.
In recent weeks, however, sources say that Bank of America Merrill Lynch could be found appearing on UK and European financings. Indeed, late last month, the bank provided a €1.06 billion loan to Germany’s Gagfah to refinance maturing debt on its 37,000-unit Woba residential portfolio. Morgan Stanley is another bank recently writing term sheets for UK real estate financings, while JPMorgan appears to be ramping up activity as well, sources add.
To be fair, few expect a sudden and much larger wave of US lenders to add to these names. Still, the apparent willingness to lend by those mentioned is important because they add to a sense that real estate finance in Europe finally might be loosening up.
“We are seeing various institutions trying to get back in after avoiding the market for a few years, from UK clearing banks to French and German banks to American insurance companies and banks,” says Gad Caspy, managing director and head of commercial real estate for Europe, the Middle East and Africa (EMEA) at Deutsche Bank, which probably has been the most consistently active real estate lender in Europe in recent years. “Some of the US banks are following their clients from the US and some are opportunistic, but they are definitely all coming here now.”
Given the retreat of many European banks, partly due to increased regulatory pressures coming from the European Banking Authority and Basel III, it is clear why some American lenders are stepping in. It also is clear that the UK is the major focal point for those banks right now.
Anil Khera, who oversees capital markets financing in Europe for The Blackstone Group, notes that French, Spanish and Italian banks had retreated from lending, which led to very little liquidity in some markets. The UK, on the other hand, has seen the most capital coming in, with much of it emanating from North America and some capital also coming from Asia.
“Reduced lending from European banks has had a big impact on liquidity as they historically have provided the vast majority of real estate debt in Europe,” Khera says. “Change does seem to be underway, particularly in the UK, with increasing amounts of senior debt coming from non-bank lenders and from other parts of the world.”
Wells Fargo and Bank of America Merrill Lynch may well be stepping back in, but Natale Giostra, head of the UK and EMEA debt advisory group at CBRE in London, says the picture is not yet clear how some of the returning banks are lending. He points out the difference between balance sheet lending, where a commercial bank uses its own resources to fund borrowers and keeps the loan on its balance sheet, and the most prevalent investment banking model, which involves originating and distributing the loan.
“It matters a lot,” Giostra emphasizes. “If a commercial bank is lending from its own balance sheet, it obviously is its own money, so it fully controls the loans and sets the interest rate it likes. On the other hand, if a bank is originating and distributing loans, it is subject to the market. Either you have nothing to lend as no one will want to buy the loans or you take on the associated syndication risk with the outcome of holding the loans on your balance sheet to maturity if no one buys the loans. For the latter, which investment bank is willing to hold low-margin senior mortgage loans? This does not add to the total amount of liquidity in that sense.”
Giostra continues: “US banks lending from their balance sheet is not really something in which you can see a trend. The bigger trend is more lending by insurance companies, which are using their own balance sheets to lend at the rates they like and to the borrowers they like.” He cites such US insurers as TIAA-CREF, MassMutual, MetLife and American International Group (AIG) as examples. European insurance companies such as AXA, Allianz and Legal & General also are lending.
“I think, if you are an opportunity fund, you will feel better about things,” Giostra says. “Basically, there is more liquidity and interest. Then again, it depends what you want to buy. There are some assets that no one wants to lend against.”
A deep Well
How the US banks are thinking about the UK market is difficult to assess because Wells Fargo is the only US bank to have gone public on its plans. It already has said it sees a “tremendous opportunity” to finance its US clients, such as Blackstone and Westbrook Partners, among others. In addition, it is looking to lend to new UK-based clients, including private real estate funds.
Chip Fedalen, head of Wells Fargo’s commercial real estate institutional and metro market group, says the bank first looked about 12 months ago to team up with US clients that previously had invested in the UK as a lower-risk strategy compared to simply “unfolding the Wells Fargo sign and saying ‘Here we are.’” On balance, the ‘arrival’ of Wells Fargo has as much to do with its history in the UK and Europe as anything else, which perhaps makes it a one-off rather than signalling that a wave of other US banks will follow it.
San Franciso-based Wells Fargo took over Wachovia Bank in 2009 and inherited a lending operation in Europe, which primarily was a book of CMBS in the UK and Germany. So, it started with a Wachovia team on the ground and hired more people in London. “As we worked through the portfolio, we realized that the central business district of London in particular was an interesting market,” explains
Fedalen. “We decided that, while we worked on resolutions, we would look at what it would entail to consider loan production in the UK.”
Wells Fargo determined it would be difficult to start with UK-based clients it hadn’t worked with before, so it started with its US clients instead. It also employed Clifford Chance as legal counsel and was not surprised to find out that English law was similar to US law in terms of a lender’s rights. The economic case also helped.
Indeed, the banking situation in the UK looked and felt like the US market three or four years previously in that the “competitive landscape” was suddenly very different. No longer were all the English, European and international lenders vying to provide loans to UK real estate.
The lack of competition clearly has led to wider margins for American banks to enjoy in the UK than in the US. Fedalen estimates margins for London real estate lending versus New York are probably upwards of 100 basis points. Still, as attractive as that might be, Wells Fargo is not chasing ‘hot money’.
“The situation now provides a compelling case, but Wells Fargo is not in it just for the cycle,” Fedalen says. “We want to be there as part of our core business plan forever. Now is a great time to establish and build relationships so that, when – not if – the market becomes competitive again, we will be one of the names to go to among quality real estate owners, operators and developers.”
As an example of the type of funding it has provided to opportunity funds in the UK, Fedalen cites a portfolio of industrial assets called Project Triangle, for which it and a club of lenders provided financing to Blackstone. “We are looking for deals that have both measurable and mitigable risk,” he says. “We don’t mind taking some risk as long as we understand it.”
While Fedalen says he hasn’t seen his US competitors “come over in a big way,” he notes the presence of international competitors. “We are starting to see the Chinese banks and some European banks, though there are just not as many as before,” he adds.
The extra liquidity is not only helping opportunity funds to make acquisitions, it also can provide an extra option when it comes to exits. Take Blackstone, for example. Just before Christmas, it sought and got interest from potential purchasers for Chiswick Park, a 1.8 million-square-foot office park to the west of London that it bought for £480 million in 2011. Seeking to hurry along a potential sale over the festive period, the firm sought by out finance packages for potential buyers.
As it turns out, Blackstone was surprised enough by the attractive lending term sheets it received that it decided it could refinance Chiswick Park rather than sell it. That would enable the firm to take some equity out and make a distribution to investors. At press time, no refinancing had been agreed, but it goes to show how increased liquidity is helping opportunity funds.
At the same time, the increasingly competitive lending landscape is causing spreads to tighten, posing the question whether banks already might have missed the best lending deals. The realistic answer, according to market participants, is that the deals of 2011 and 2012 probably will be looked back upon as being fantastic, but returns in 2013 still will be attractive, especially relative to the US.
So long as that is the case, some US banks – along with other new sources of finance – will look to be active in the UK – and possibly in parts of Continental Europe in the fullness of time.