Increasing signs of distress while debt funds increase their debt fire power for opportunities

A year after the first increases in interest rates by Central Banks around the world, the CRE debt market is starting to show its distress. FinLoop’s CRE Debt Liquidity Barometer for August shows 20% increase from July of new lending activity across Europe

Latest market activity:

• Since the start of 2023, FinLoop’s digital debt marketplace for commercial real estate loans has witnessed a rapid surge in transactions with €800million of new lending requests on a monthly basis between January and May 2023. Over the summer period June has been the slowest month with a drop of 80%, but back up by a similar amount in July and activity has continued throughout August.
• Among the various asset types, investors have primarily sought financing for residential assets, constituting 26% of loan requests, followed closely by logistics at 25%, retail at 12%, and hotels at 11%. Office-related loan requests accounted for a smaller portion, representing only 4% of the total. At the same time, requested loan-to-value on for loans has declined for office assets to 35% from 59% between Dec 2022 and June 2023, logistics to 47% from previously 65% LTV, residential to 49% from 53% LTV.
• Development finance has been one of the most difficult areas to arrange in the UK and Europe is difficult to find and only available at rates, which often make the projects uneconomic. Debt funds have been the most active lender group since the beginning of 2023, while many banks have paused, and are very cautious about new lending, Debt funds are also keeping the development market active, and are working closely with borrowers to finalise construction projects. In some of these deals, the debt fund might step in various positions of the projects, with a clear upside through profit shares, debt to equity swaps, or stepping into senior and mezzanine positions.

Latest rates: 29th August, 5yr Sonia swap 4.83% – 5 yr Euribor swap 3.09%

• Rates: the 5-year Euribor swap and 5yr Sonia swap rates remained stable between July and August, but slight increases are expected since the BoE rate increase decision early August. 5yr swap rates are now slightly below the 3month rates, but not substantially enough to make a difference for borrowers who are unsure about a five year loan versus shorter term.
• The effort to keep inflation under control meant that the European Central Bank (ECB) raised interest rates 25 bps in June 2023, marking the eighth consecutive hike and bringing the cumulative increase to 400 bps since July 2022. It is expected that the ECB will raise interest rates twice more, taking the deposit rate to 4.00% and will keep this peak until the middle of 2024.
• Interest rate coverage ratios are re-setting at new levels for newly acquired and valued assets.
• European margins have further widened during H1 2023, 80bps for prime assets. For all asset types, there is a pricing gap of 70 – 90bps between prime and secondary assets. Loans for logistics and office now price the same as for retail assets, as lenders are cautious in all cases. Funding for more specialist assets such as hotel or student housing will price over 300bps onwards for very low LTV plus swap costs.
• Lending over 60% LTV is typically only offered by debt funds, with banks only offering up to a maximum of 60% LTV. Overall, loan margins rise substantially for loans over 60% LTV, the pricing gap can be up to 300bps wider in these cases.
• Borrowers have adjusted their expectations of achievable LTV’s for new lending downwards. Junior or any other capital ranking behind the senior bank loan may step into the loan from as low as 55% LTV.

Latest deals across UK & Europe:

• Netherlands: Large deals, which went ahead during the last months showed that large banks are still active on a club basis,  BNP, HSBC and Standard Chartered provided €600 million loan to refinance Eindhoven High Tech Campus in the Netherlands,
• Germany: BayernLB leads German banking consortium to refinance €675 Million Commerzbank Headquarters.
• UK: Investec led a club of banks to provide a £122 million loan to LCN Capital Partners, the New York-based private equity real estate firm, is developing the Unilever new global headquarters in Kingston-upon-Thames, southwest London, and debt fund BentallGreenOak wrote a  €114.7 million loan to refinance Castlelake’s Dutch Retail Portfolio.
  Debt funds are increasing their debt fire power. New debt funds have been raised by Patrizia, German based BF direct – BF Capital, Incus, private credit manager Hayfin Capital Management has raised more than €6bn for its latest direct lending fund targeting Europe, and Hilco Global enters UK real estate debt market to provide a bridge finance.

Market distress:

• German development projects from AEW and BNP run into difficulties. Three German development projects are going into insolvency. Development Partner Duesseldorf and Project Real Estate Holding are going into insolvency.
  Oaktree lent €99.6 million of mezzanine debt at 6% for the circa €700 million purchase of the Highlight Towers in Munich in 2021 by Imfarr and Swiss investor SN, which is now in insolvency. The debt matures on 31 August 2024. German banks Helaba and Pbb provided the senior debt. Austria’s Imfarr and Switzerland’s SN Beteiligungen Holding.
• Oaktree seized control of three Imfarr properties in August,  once worth €2.3 billion. The properties include the Silberturm office tower in Frankfurt and the Highlight Towers and the Elementum office project, which are both in Munich. Oaktree also provided junior debt for the circa €630 million acquisition of the Silberturm office tower in Frankfurt in 2020, according to the SPV OCM Luxembourg ECS II Kaiserlei Omega Sarl. The loan carries a 6% interest rate and matures on 24 March 2024. Helaba provided senior debt, which matures on 30 September 2024, according to the accounts filed for one of the special purpose vehicles Silberturm JPP 1 GmbH & Co.

 The FinLoop credit view provides a monthly overview of the latest debt financing activities across Europe, along with insights into lending rates and market interest rate movements. 

FinLoop offer AI powered digital tools for real estate professionals including a debt marketplace for lenders and borrowers to arrange financing deals. FinLoop’s cloud based and white label tailored solutions are available for loan origination & syndication, debt raising,  loan management and servicing.