Pricoa makes another London loan

Pricoa Mortgage Capital has continued its inroads into the UK lending market, with a loan to Hines for the acquisition of 1 Westferry Circus at Canary Wharf in London.

The US insurance group has made a c£50m, seven-year loan to the US property company for the £83m acquisition, representing a 60% loan to value.

Competition to finance London assets and experienced borrowers is increasing all the time, as liquidity for these kinds of deals continues to improve and new lenders enter the market. Pricoa is thought to have offered an attractive margin in the 230-250 basis points range over the seven-year swap.

The 203,000 sq ft asset is not as dry or super-prime as others fought over by lenders in central London in recent months. About 75% of the income that is secured on leases to occupiers Valero and Littlejohn expires in six years’ time in 2019, and Hines wanted to finance out beyond the expiry.

The building was acquired from TIAA-CREF for the Hines Global REIT.

Ian Brown, Hines’ UK finance director, said: “We were pleasantly surprised by the level of interest in the financing. There are more new parties to go to now.

“Pricoa was prepared to be flexible on covenants and most importantly to structure around the lease breaks and give us a seven-year loan”.

In Pricoa’s first deal after opening in the UK last year it lent on four central London properties, for O&H Properties. The US mortgage lender then did a second with O&H, that added a fifth central London asset to that portfolio.

Last month Pricoa made a €55.5m loan to WP Carey secured on a Dutch logistics portfolio and it is  the frontrunner to refinance Plantation Place in the City, alongside another US insurance lender new to Europe, Pacific Life. That deal could be as large as £280m.

Pricoa is the commercial mortgage lending business of US insurer, Prudential Financial.

Jane Roberts, editor

See next week’s Real Estate Capital for an eight-page report on institutional investment in private rental housing, including interviews with M&G Real Estate’s Martin Moore and Legal & General Property’s Bill Hughes. 

Also, catch up on last month’s Commercial Real Estate Finance Council’s conference; read an interview with Standard Life Investment’s property chief David Paine;  and see features on the stress facing the high number of European funds due to terminate and on the first new CMBS issued in 2013.

Blog | Signs of Spring?

Europe’s property people are starting to think their long winter might be waning. Tiny green shoots have been mentioned, and at London Business School’s real estate conference last Friday, none other than Sir John Ritblat – who’s been through a cycle or three – said he smelt “a hint of change” in the air.

LBS was the third real estate pow-wow I’ve attended in as many weeks, INREV and the Commercial Real Estate Finance Council Europe being the others.  The mood was pretty similar, as were the reports from speakers and panelists on the front line:  since the start of the year, there’s been more debt, more transactions and more of a risk-on vibe from investors. 

At LBS, Peter Epping, who manages Hines’ pan-European core fund has noted a “big change in mind-set” about how deals are approached.  There’s more appetite for risk – shorter leases, re-letting opportunities.  The market is “very deal focused”.

But let’s not get too excited; there’s still a big difference between the micro-climate in gateway capitals like London and the rest.  Though international investors are still sticking to the “90 minute rule” and won’t look at anything that is more than an hour and a half’s journey out of London, Knight Frank’s Darren Yates says there’s better value in the regions, “Regional, tier-2 cities are coming increasingly onto the radar.” Rents, he thinks have probably bottomed out, and incentives are starting to harden. This was seconded by Jones Lang LaSalle’s UK chairman, Chris Ireland, who noted the regional markets are more buoyant.  “We’re seeing a ripple effect, seeing more buyers for reasonable quality product, institutional and debt-backed.”

Debt is also thawing, thanks partly to the government chucking money at banks via the Funding for Lending Scheme and partly to new, non-bank lenders. But the LBS panel – chaired by our own editor, Jane Roberts, also cited the divide between London/prime and the rest.  

Amy Aznar, who heads LaSalle Investment Management’s debt investment, noted most lenders are targeting the same good assets. “Once you get outside that box, it gets much thinner, and when you get out to the regions, sometimes there’s nobody.”

Blair Lewis, who at RBS has the challenging job of selling off the bank’s noncore (ie distressed and/or unwanted) assets like regional portfolios of offices and industrial units, thinks liquidity is coming fast, from the US.  He predicted US banks will set up “industrial platforms”, working with regulators and find a way to “bring technology back into credit”, to originate a first-loss type approach that will have liquidity, tying debt investors in more directly. “It’s inevitable. It will happen.”

A few other trends:

• The current penchant for investors, particularly the larger ones, to want a bigger say in how their money is used, eschewing pooled funds.  Will they be able to manage all the clubs and jvs they spawn?  Do they really have the control? “A lot of investors are deluding themselves,” argued Roberto Varandas of Aberdeen Asset Managers.
• Heavy storm clouds over retail. Now it’s about what investors can do to assets to drive returns: can tenants be moved around?  Leases reduced?  Is there daily information?  “We have 40 years of data on unit shops but they are increasingly irrelevant except for a few prime locations,” said Andrew Burrell, Jones Lang LaSalle’s head of forecasting. Scary thought. 

Alex Catalano, consultant editor

Blog | What I learnt at INREV’s annual conference this week

The great, the good and not-so-good of real estate fund management were at INREV’s annual gathering last week.

As Proprium Capital’s Willem de Geus pointed out in an entertaining double act with CBRE Global Investors’ Pieter Hendrikse, while most fund managers are based in northern Europe, INREV’s pow-wow is typically held in sunny southern Europe.

This year’s, in Barcelona, conformed to pattern. Here are the high points:

• Real assets – infrastructure, real estate, farmland, timberland, energy – are the big thing brewing up with long-term investors. Joe Azelby of JP Morgan expects they will make up 25% of portfolios with 30% in fixed income, 35% in equities, public and private, and 10% going for absolute returns.   Real estate will be a big part of the real assets bucket, but “don’t play in this space if you need liquidity”, Azelby warned. Some of the big guns at the conference – CCPIB, Texas Teacher’s pension fund, APG – are already well into this process.

• Barry Blattman of Brookfield says there is a lot of appetite for value-added real estate and a resurgence of opportunistic. In the US this is being driven by investment consultants.  Alex Jeffrey, the head of M&G Real Estate (ie Prupim) real estate is more muted, saying there’s “a bit more risk appetite at the margin”.

• Big investors are still control freaks. They’re focusing on separate accounts, clubs and jvs, leaving funds for specialist things they can’t access otherwise.  Their obsession with control and alignment extends not just to having GPs and their staff personally co-invest in funds, but asking a GP to provide a personal financial statement detailing personal assets, etc and also to revealing staff salaries.  In the one case of the fund management company being asked to co-invest, investors wanted three times annual profits. GPs are not amused.

• INREV is changing to accommodate other vehicles besides funds.  It’s amended its article of associations and will be including clubs in its index.  JVs are also welcome.  But fund managers think the pendulum will swing back to the new-style, properly aligned funds, as investors discover that clubs and fellow-partners are just as difficult to deal with.

• Jerry Speyer of Tishman Speyer is bullish on China and adamant that his firm has not encountered any corruption there. Spain is “a terrific opportunity”. But Russia is “too complicated”.

• Paul Mouchakkaa, executive director at Morgan Stanley Real Estate, advises investors devising their strategic plan for real estate to “think about it like buying a house”. And, “trust and expertise” are the two essentials to focus on in choosing a fund manager.  The title of his presentation was “Investing in time: Lessons for success”. ‘Nuff said.

• Spanish bankers bombard you with PowerPoint slides filled with lots of graphs and numbers to show that their banking system is being sorted out and is in better shape than you’d think. They also speak very fast.

• Joe Azelby has written a book with his brother Bob, vice president and general manager of oncology of Amgen. It is entitled “Kiss your BUT good-bye”, or as they explain: “Two jersey boys on a mission to eradicate the workplace behaviors that make everyone’s job harder than it needs to be”.

• Willem de Gues and Pieter Hendrikse are the Griff Rhys-Jones and Mel Smith of fund management. Their double-act as newsreaders reporting on the 10 years of INREV and fund management had delegates in stitches. “It’s the British humour. We Germans could not do this,” one delegate explained to a Swedish colleague.  Actually, it was Dutch humour.

Alex Catalano, consultant editor

Property derivative sub-sector contracts launched by Eurex

Eurex has expanded its range of property derivative contracts by listing five UK market sub-sectors based on IPD quarterly indices.

The sub-sectors, or ‘segments’ as the Eurex derivatives exchange calls them, are: shopping centres, retail warehouses, City offices, West End and Midtown offices and south-eastern industrials. They were listed on the exchange this week.

As with Eurex and IPD’s All Property and retail, office and industrial contracts, the new contracts are based on total returns in a calendar year and one contract has a £50,000 notional value. Buyers of annual exposure pay a fixed price, with sellers receiving a fixed price.

Trading in property derivatives has been moving away from bilateral swaps, where parties trade directly with a known counterparty, to Eurex’s ‘on exchange’ futures product, where  the trades are cleared centrally, dramatically reducing counterparty risk.

In the last four quarters, to end of Q1 2013, Eurex’s market share has been much higher than the volume of swaps.

However, annual total property derivative volumes traded have been falling since 2009 and were only £780m in 2012. The lowest ever quarter was Q3 2012 when volumes declined to £53m, although they recovered to £259m in Q4 2012 and are expected to be at a similar level for Q1 2013 when the figures are published at the end of this month.

Participants hope that the opportunity to trade sub-sectors will help the market to recover. Charles Ostroumoff of broker BGC, said: “Property derivatives is evolving from an interbank, swaps market to an exchange, end-user market. It’s a trend that began about 18 months ago to the point that at least 90% of trading is now on exchange”.

Jane Roberts, editor

Spanish loan restructuring agreed for Morgan Stanley

Bondholders have agreed to the first restructure of an underwater securitised loan secured on a Spanish property.

Morgan Stanley Real Estate Fund’s request to extend €105m of matured debt secured against the IBM headquarters in Madrid was approved by its lenders yesterday.

To avoid crystallising a loss by selling now, the class A, B and C noteholders within the Rivoli Pan Europe CMBS agreed to the borrower’s restructuring plan, which involves extending the loan’s maturity by two years initially.

They will be rewarded with a consent fee of 1.1% (of the loan amount based on their holding of notes as a proportion of the relevant class); 0.9%; and 0.7% respectively, to be paid pro-rata.

The two-year extension will allow MSREF to negotiate a renewal of the building’s lease with IBM, which expires in September 2015. If it is successful, or if the property is otherwise re-let, MSREF can opt for a further one-year extension during which time it must sell the purpose-built asset, which is currently worth €74m. AgFe is working on the borrower’s behalf.  Cushman & Wakefield is the valuer.

It is estimated the building’s value could shoot up by more than 40% to €115m if IBM renews its lease for 10 years – more than the outstanding loan amount.

Morgan Stanley was reported to have paid €220m for the Avenida de America complex in 2006, an illustration of how far values have fallen in the Spanish property market.

The noteholders, who were advised by Brookland Partners, will also receive a deferred exit fee if the property sells at above a threshold price where the loan has been repaid in full and the sponsors have received a small percentage recovery of their equity.

This is the first time such an initiative has been included in a multiborrower CMBS. Their nature makes it difficult to pass through increased value to the noteholders without it impacting other parts of the structure.

Lauren Parr, Real Estate Capital

PRUPIM £105m private rental buy “could be cornerstone” to bigger investment

PRUPIM today acquired a £105.4m housing investment portfolio, which chairman Martin Moore declared could be a “cornerstone” to a larger residential commitment by the fund management giant.

Moore raised the possibility of further residential investment following the purchase of 534 private rental units in 13 locations across Greater London and southern England from joint vendors, the Berkeley Group and the Homes and Communities Agency (HCA).

PRUPIM, the real estate investment management arm of M&G Investments, will take on the management of the portfolio on completion, currently expected in June, with Berkeley becoming a minority co-investor.

The deal represents a significant endorsement of the private rented sector by a leading mainstream institution, which like many of its UK peer group has over the years bemoaned the lack of opportunities for large-scale residential investment.

Moore told Real Estate Capital: “We’re taking one step at a time. What I’m hoping is that this [acquisition] will engender further dialogue, debate and discussion about the sector. Hopefully we will speak to others who may notice this announcement and want to understand our thinking that led us to make this investment. Who knows where that might lead in terms of engagement and prospective relationships over the months and years ahead?”

He added: “Could this group of assets be a cornerstone to a future, larger residential opportunity or fund? It could be. Really, time will tell.”

PRUPIM bought the portfolio on behalf of its biggest fund, the Prudential Assurance Company Life Fund. The fund manager is aiming for total returns of 7-10% from the portfolio, which is 97% let.

The portfolio was created by Berkeley following a landmark deal in September 2010 as part of the HCA’s old private rented sector initiative. Under the terms of the deal, Berkeley received £45.6m of HCA funding, which allowed the housebuilder to bring forward development on key sites that might otherwise have stalled. The HCA retained a 20% interest in the rental properties before today’s sale.

Doug Morrison, Real Estate Capital

Borrower a frontrunner to buy NAMA’s Aspen portfolio

The borrower of the €810m of par loans in NAMA’s Project Aspen sale has emerged as a frontrunner to buy back the debt.

Irish investor David Courtney is working in partnership with US investor Starwood and Irish corporate finance boutique Key Capital, and they are one of three frontrunners to buy the portfolio.

The other two shortlisted bids were made by US debt investor Pimco – the biggest bond fund in the world – and private investors the Reuben brothers.

Pimco’s interest could reflect the relatively high-quality of the all Irish assets underpinning the loans. There are about 30 mainly office and retail properties including the Garda police headquarters in Dublin’s Harcourt Place and the Merrion Gates development at Sandymount.

The retail includes two supermarket-anchored shopping centres, in Lucan in Dublin and  in Waterford, and shops in Dublin’s upmarket Rathgar.

Meanwhile, Savills, Jones Lang Lasalle, Allsop & Co and CBRE are to be appointed as valuers of the Irish Bank Resolution Corporation’s mainly real estate loan book.

The Irish government announced on 6 February that the bad bank was being wound up and KPMG was appointed special liquidator.

IBRC was set up separately to NAMA to own loans with a €26bn face value made mainly by Anglo Irish Bank and some by Irish Nationwide. The book was revalued two years ago, and must now be revalued in a very tight timeframe in order to offer the debt for sale in the next few months.

The valuers worked on the previous valuations two years ago which should help to speed up the process.

Ireland’s minister for finance, Michael Noonan, said “specific portfolios” will be offered for sale at or above their independent valuation. Any not sold by the end of August this year will be sold by KPMG to NAMA at the valuation price.

After values crashed by 70%, the Irish commercial property market began to recover in the second half of 2012 and is attracting huge interest from international capital, as Real Estate Capital reported in detail in our January issue.

Jane Roberts, editor

See next Monday’s Real Estate Capital for more on this story and on other loan sales including the Irish Bank Resolution Corporation liquidation process and Eurohypo’s UK book.

The March issue also includes a special feature on pension fund consultants and multi managers, profiles of CR Investment Management and Venn Finance and data on new lending deals.