May 2015 Issue

Bank of America Merrill Lynch analysts have recommended that regulators look to lessons learned from defaulted CMBS loans to create a set of criteria for future high-quality real estate loans, which could in turn be used to design a high-quality CMBS product. BAML’s Historical drivers of CRE loan performance report identified recurring factors that created defaults and losses among European CMBS loans, including vintage, leverage and property type.

It was London’s hottest day so far this year on the eve of the Commercial Real Estate Finance Council Europe’s Spring Conference last month, so naturally, the question on everyone’s lips was how long will it last? For the weather, not long at all, with the mercury soon dropping rapidly, but London’s property finance professionals are hoping for better. More than 230 converged on K&L Gates’ St Paul’s offices for the two-day event, to discuss the state of the market and the threats to its relatively benign climate. Overall sentiment was positive, with more than 84% believing the market was still moving towards a peak and only 4% believing the top had been reached. Borrowers felt that things had clearly turned in their favour. Funding was becoming cheaper, with competition fierce among lenders. Banks had recovered their real estate appetite, with insurers and debt funds joining the party.

With a liquid and fiercely competitive market for real estate, panellists at Real Estate Capital’s inaugural Germany 2015 Forum, held at Kempinski Gravenbruch, Frankfurt, last month, discussed whether lenders could keep chasing margins down and where to find value. Germany’s real estate market is flush with cheap debt. “There is an oversupply of bank finance and that is a challenge for an international bank,” said Jürgen Helm, HSBC’s head of German real estate. Deutsche Bank director Jörg Oestreich concurred: “Everybody is chasing exactly the same assets and that is why our lending margins have become so low.”

Former Deutsche Bank property debt specialist Brian Sedrish has led US developer Related Companies’ successful move into real estate lending, initially in the mezzanine field but more recently offering whole loans.

Good income prospects attract family offices to real estate debt, writes Lauren Parr Designed to preserve wealth, family offices are notoriously hard to get information on. But their love of direct property is well known, and now, says the founder of one oil wealth-backed lending business, their real estate debt allocations are also growing. “Family offices generally look at real estate debt as an asset class in its own right,” he says. “Real estate debt allocations have grown among family offices and the larger private banking groups that service them. This is coming through fund allocations, managed accounts, syndications, or, for some larger family offices, directly.”

A string of big real estate debt mandate won by US commercial real estate lenders shows growing confidence among large institutional investors seeking greater control over their money. Compared with pooled debt funds, separate managed account mandates, or SMAs, generally give investors more say over the investments their fund manager makes, often with targets based on yield, total return, minimum debt service coverage, maximum loan-to-value ratio, asset types and geographic diversity.

With a politician’s impeccable timing, Narendra Modi, India’s pro-business, pro-foreign investment Prime Minister, celebrates his first year in office this month, during what appears to be something of a boom in the country’s market for real estate debt finance, much of it from overseas. New Cushman & Wakefield figures reveal a surge in the number and value of Indian real estate private equity deals, but with a post-financial crisis focus on structured finance rather than riskier equity investment.

Deutsche Asset & Wealth Management’s senior debt fund is a new player in a very competitive league. Senior lenders are a dime a dozen on its home turf, Germany, and that domestic market is the fund’s “top priority”. Closed with €500m in January and with more capital in the pipeline, the fund is squarely in the safe, conservative space: targeting loan-to-value ratios of 60%, on three- to 10-year terms, in the four main asset classes, and fixed or floating rate.

Returns on senior UK commercial real estate debt are forecast to be 3.6% on a gross basis and 3.5% on a risk-adjusted basis at the end of Q1 2015

PERE Research and Analytics’ monitoring shows 73 debt funds in the market this month, seeking a total of $37bn. New entrant Och-Ziff is seeking to raise $800m for a high-yield US commercial real estate debt fund, targeting distressed and alternative assets.

After years in the doldrums, CMBS is on its way back. Although deal activity remains low compared with the heights of 2006, it is increasing across the US and EU as investors seek higher yields. As the market starts to recover, the regulatory landscape has shifted, to one of risk retention and closer bed fellows. Recently, the Bank of England and European Central Bank published a joint response to a European Bank Authority report late last year on how to improve (or retrain, depending on your perspective) the securitisation markets, mainly by tightening EU risk retention rules.