In 2015, finance in global real estate presents at least three faces. Firstly, there is the investment opportunity stemming from the hundreds of billions of dollars and euros of over-stretched CMBS transactions structured pre-financial crisis. Second, there is the opportunity for alternative lenders such as private equity real estate firms to provide credit. Thirdly, there is the liquidity overall that fund sponsors need to function well in order to carry on making fresh deals or refinance existing investments. In this special report we turn the spotlight on some of these issues.
The headline news from this report is that in the US there is absolutely still plenty of capital available to finance deals. Debt is still cheap. Interest rates on floating-rate loans often favored by private equity borrowers are typically based on the London Interbank Offered Rate (LIBOR). These rates have been well below 1 percent since the global financial crisis – 30-day LIBOR was close to 0.17 percent in January, about where the 30-day rate has been for the last four years. That works out to very low rates for floating-rate borrowers, including many private equity real estate firms that currently can borrow at less than 2 percent.
In other words, things are pretty good in US debt right now, whether you are involved in a new deal or refinancing an existing investment. As becomes clear over the following pages, there are still the same large banks and insurance companies that are lending to private equity real estate fund sponsors. Meanwhile, CMBS issuers have seen their ranks added to. One leader at the real estate capital markets group of a broker estimated there were in the range of 40 CMBS lenders. Also, there are certainly new debt funds providing higher yielding loans and new entrants are involved in mezzanine plus preferred equity funds. But for straight senior lending, the market has not really seen that many new shops. That said, as we highlight on page 36, there are certainly some notable exceptions that are getting particularly excited about construction loans for high-end residential skyscrapers in gateway cities such as New York. However, the key difference in private equity real estate is that there is no massive influx of international groups in US real estate finance like there is on the equity side.
Meanwhile, the picture in Europe is similar in one major respect. For the right sponsor, there are plenty of options when it comes to getting debt to finance transactions. But big news from Europe is that the CMBS market is finally showing signs of activation. It has shifted from the simple securitization of a single asset in one country with one underlying borrower to multi-loan CMBS, multi-sponsor CMBS, new geographies and now apparently even nonperforming loans. Next would be multi-jurisdictional CMBS. Crucially, as we show on page 39, it is private equity real estate firms as borrowers that are leading to the development of CMBS in the region.
But where does all this leave the private equity real estate professional? Times are generally good in terms of liquidity, but intriguingly there is huge opportunity to make opportunistic-like returns from investing in the broken loans originated in the run-up to the global financial crisis. A new wave of CMBS default is expected to begin in 2015 in the US and in Europe the first wave is seriously underway in terms of unwinding stressed CMBS transactions of old. Given this scenario, are private equity real estate firms gearing up for the opportunity by hiring from lenders? We address that question on page 41 in a feature called Across the Divide.