Investors look to take advantage of fixed-rate refinancing opportunities
As real estate investors question how much longer the current extended cycle has to run and fixed rates remain low, investors are viewing their existing portfolios with refinancing in mind.
More commercial real estate investors are locking in attractive financing terms as a late cycle strategy in Europe.
Demand for fixed rate, longer-term finance has grown in recent months, explains Michael Kavanau, EMEA debt advisory at JLL.
Persistently low interest rates in Europe and the UK have made refinancing attractive, but that’s only part of the reason for increased lending activity. Potential challenges with redeploying capital after selling assets is also a driving factor.
“Offloading property may be straightforward when there’s no shortage of potential buyers, but many owners still need to retain their allocations to real estate,” says Kavanau. “Coming out and then redeploying that capital is far from straightforward.”
Competition for real estate is fierce. Blackstone recently raised its largest ever fund at $20.5 billion and the world’s 10 largest managers added €7.2 trillion ($7.87 trillion) of real estate assets to their management between 2014 and the end of last year, according to JLL. More than €150 billion ($164 billion) was raised by 35 non-listed real estate funds in the plus-€2 billion range.
“Real estate owners are asking themselves what their best option is,” Kavanau says. “Increasingly, they’re landing on refinancing.”
A growing part of the market
Fixed rate loans now account for around one quarter of Europe's real estate lending market, Kavanau estimates, up from around 15 percent around five years ago.
“The market for fixed rate loans has undoubtedly grown – that’s also helped by increasingly favorable costs of debt,” he says, pointing to margins for long-term fixed rate finance of around 1.5 to 1.9 percent for high quality investment loans and 1.1 percent for “best-of-the-best”.
“It’s an attractive cost of capital for borrowers,” says Kavanau.
At the same time, demand for refinance could also come from investors in retail assets, particularly secondary and tertiary shopping centers where values have fallen, and debt covenants are potentially at risk. With lenders reluctant to foreclose, borrowers could be pushed to inject further equity or secure further financing.
“There are signs that financing decisions among some borrowers are not necessarily being made purely with comfort in mind,” says Kavanau. “Being proactive is certainly wise; holding on to what you have for longer is now a popular choice.”
Backing of debt vehicles managed by global investment managers shows no sign of abating. And with Europe having historically lagged North America in terms of alternative so-called non-traditional lenders, the continent continues to appeal.
“Europe in particular is proving to be an evergreen hunting ground for North American debt funds, private equity funds and lenders from the insurance world,” Kavanau explains. “The latter in particular are finding that returns from European real estate financing are aligned with their needs for long-term, reliable returns.”
The emergence of more so-called “alternative lenders” from the non-banking world has increased the choice on offer for borrowers; new entrants continue to emerge. Rivercrown, Maslow Capital have made inroads into Europe recently, while this year, US commercial property lender, Starz Real Estate financed acquisitions retail and hotel acquisitions in Spain and in Belgium.
More than $42 billion was raised between 2014 and the end of last year by debt funds for European real estate lending strategies, according to Real Estate Capital. Around US$13.6 billion in private debt dry powder is available globally to invest in Europe, according to JLL.
“North American vehicles and investors continue to be drawn to Europe – currency is certainly playing a part in that,” says Kavanau. “It’s capital that’s disciplined and doesn’t look to stretch beyond current risk levels.”
Loan-to-value ratios in Europe average around 65 percent for senior debt, which Kavanau says is “admirable self-policing by lenders”.
As real estate owners continue to look to take advantage of attractive refinancing terms, Kavanau says the emergence of more alternative lenders will further widen the choice for borrowers.
“Non-traditional lenders now account for around 20 percent of UK real estate lending – that’s double what it was five years ago,” he says.
For those who allocate funds to debt strategies, real estate finance is offering a level of return which is hard to find elsewhere.