Victoria Young reviews the changing property finance landscape
Berwin Leighton Paisner (BLP) head of real estate finance Naveen Vijh surveys a much changed landscape: ‘We have a much more diverse client market now. It is important to know the whole of the market, its whole breadth.’
The landscape may be more diverse but it has also certainly been a good couple of years for the City’s real estate finance specialists. Dealogic data shows European real estate loan volumes took flight in 2014, when the number of ranked loans more than doubled to 124 from 52, boosting total deal values to $50.9bn from $20bn. In 2015 the trend continued, with the number of deals rising to 169. By value, $74bn worth of transactions were completed, a 45% increase on 2014.
A wider range of sponsors and funds piled into the market during the post-crisis period in which banks retrenched from property-related lending but now the traditional lenders have come back to a sector to find a varied group of actors.
Such has been the revival in the sector that property finance – which during the 2000s was seen by many City teams as the poor cousin to leveraged and capital markets work – has become one of the most lucrative sectors in banking law.
Allen & Overy (A&O) partner Arthur Dyson cites several factors that contributed to the pick-up. ‘We had the tail of legacy work, non-performing loan portfolios plus senior and mezzanine lending in the UK and Europe.’
Linklaters partner Trevor Clark notes the ‘real buoyancy’ thanks to new entrants such as alternative credit providers, and US private equity players. Meanwhile, fresh investment has flowed into the sector, with Clark noting: ‘It has been a busy time on the new money side.’
Unsurprisingly, the run-up to last month’s referendum on EU membership is widely conceded to have slowed the market.
‘The key to the market has been to be flexible. A lot of the individuals we knew from previous institutions are now at the new lenders.’
Emma Matebalavu,
Clifford Chance
Now that the UK has voted to leave the EU, Clifford Chance partner Emma Matebalavu (pictured) says: ‘It is too early to tell what the impact of the vote will be. While there is immediate volatility, people are waiting to see and as the pound drops there might be opportunities.’
This anxiety is reflected in the Dealogic data, which suggests this recent boom is already slowing; for the current year to 9 June, only 25 deals have been completed in Europe, for a value of $8.1bn.
But with property viewed as safe as, well, houses, few are expecting risk-sensitive investors to turn elsewhere. Clark says: ‘There have been some macro headwinds in the last few months and it has slowed but we don’t see the buoyancy of the market being affected in the medium to long term.’
Observes Dyson: ‘When we speak to clients they are all expecting some return to normality, once we get past the summer. Some are starting to make investment decisions now and they are reporting that the pricing gap is closing so they are beginning to agree deals.’
One area still a long way from its pre-Lehman days is commercial-backed mortgage securities (CMBS) issuance, which reached $5.8bn in 2015, according to Dealogic, a fraction of the volumes seen in the 2000s. And while analysts at Bank of America Merrill Lynch have forecast European issuance between €5bn and €10bn this year, practitioners are sceptical about the market.
A&O signed the first European CMBS deal of the year in March, led by Lucy Oddy, who joined from Latham & Watkins last September. Oddy notes the deal – a €317m CMBS for The Blackstone Group backed by its German retail portfolio – came in a difficult market. She adds: ‘There is investor appetite for this product, and we are hopeful that this will encourage other market participants to unlock other deals in the pipeline.’
BLP partner Claire Watson agrees that mainstream property securitisation continues to disappoint, adding: ‘some of it is market sentiment, some of it is not having the right type of deals’.
But even here there has been an upside for advisers as the lack of a volume of cookie-cutter securitisation has had teams focused on more bespoke, work-intensive financings.
‘There’s a fairly defined pool of players, especially at the more established end because there have been periods where firms have not invested in the area.’
Mark Waghorn,
Simmons & Simmons
Her colleague Vijh adds: ‘CMBS hasn’t come back in the way it was expected to, but nothing has taken its place so people can’t take out loans and get rid of them very quickly. That means people have time to spend on individual deals. Many more are complex in nature and they don’t all need to be vanilla structures. Back in 2006/07, you were turning deals around so fast, the amount of input had to be limited. Now the time you spend on the deal is higher.’
Also feeding into this is the increasing appetite of property companies to deploy complex structured finance techniques on both their deals and their own capital structure.
This sentiment is echoed by Linklaters’ Clark: ‘We have seen more of a willingness from real estate borrowers to access capital from different sources. It used to just be senior lenders but now there are other providers like debt funds and insurance companies, which has driven a certain amount of innovation.
Clark adds: ‘You need to be a bit more nimble now as the structures are more complex – and banks have a different way of approaching things than debt funds. When you have different layers in your capital structure you need to understand how it all works, especially during a downside scenario. It’s made things interesting and the real estate finance market has developed separately from the leveraged loan markets.’
Nevertheless, the entrance of alternative funds has driven loan pricing down to an extent that unsettles some property veterans.
One City partner told Legal Business: ‘I just don’t understand how the clearers are pricing, they are being driven by competition just to stay in the market and they cannot be making any money out of it.’
He adds: ‘They are doing it to support clients and there would be some positive marketing spin they would say to any challenge to that, but it is fascinating.’
With the introduction of new lenders, teams have had to move with the clients although, in the personality-driven real estate industry, many of the players are familiar.
Dealwatch: Highlight transactions over the past year
Berwin Leighton Paisner (BLP) and Allen & Overy (A&O) took lead roles in July last year when US private equity firm Lone Star Funds acquired Wembley Arena-owner Quintain Estates & Development for £700m. BLP advised Quintain, while A&O’s team also built on its relationship with client Lone Star.
The largest property deal completed on London’s South Bank, the £550m Shell Centre redevelopment by Centrepoint owner Almacantar, threw up a host of mandates in August last year with BLP acting for Braeburn Estates, a joint entity between Canary Wharf Group and Qatari Diar. Freshfields Bruckhaus Deringer and Ashurst advised Almacantar, while Allen & Overy acted for the lenders.
In February this year, Linklaters advised Starwood Capital Group and Brookfield Asset Management on the €325m financing of the acquisition of a portfolio of Interhotel-branded hotels throughout Germany.
Matebalavu says: ‘The key to the market has been to be flexible with it and evolve with the clients and the products. A lot of the individuals we knew from previous institutions are now at the new lenders.’
Matebalavu adds: ‘We want to continue building a team, carefully as we do build our firm. We won’t be growing hugely, it is a strong area but it can be cyclical.’
The latest to build out its team is Linklaters, striking for a firm that was not long ago retrenching in real estate. The firm hired former A&O real estate finance head Mark O’Neill in April and has been explicit about its hopes of moving up a gear in the sector. O’Neill’s arrival in the City has been described as ‘a big coup’ at Silk Street, with Linklaters now fielding four dedicated real estate finance partners in London.
O’Neill returns to the City having retired from A&O to return to his native New Zealand for family reasons in 2015. Linklaters partner Steve Smith says: ‘We felt his amazing book of contacts combined with expertise would be an asset, and he has a lovely personality. It was not a planned thing but opportunistic.’
One City partner says O’Neill is a strong player and a classic syndicated debt lawyer, which could be where Linklaters are pushing their practice.
‘Mark could always [network for business], but he has always been a working lawyer and, if you look at
what A&O have done since he’s left, some people might say others have been allowed to flourish. When someone is there 24/7 doing business and the banks all look to him, it is quite hard to come out from behind that.’
A&O and CC are still viewed as having the leading practices in property finance. Aside from recruiting Oddy last year, A&O has made up two partners in the past two years, bringing its broad practice to six full-time partners.
Other muscular players include Simmons & Simmons, BLP and Herbert Smith Freehills.
Simmons’ Mark Waghorn, another of the City’s standout property finance counsel, says that there remains a shortage of quality specialists in the City, though he is hoping to reinforce his team.
He says: ‘Because of the credit crunch, there’s a fairly defined pool of players, especially at the more established end because there have been periods where firms have not invested in the area. There is a shortage of talent at certain levels.’
Waghorn concludes: ‘There was a short period pre-credit crunch when it was the thing to do. It is one of those areas which wasn’t very sexy, so if you are newly-qualified during a downturn you won’t pay much attention to it, but now that we’ve had a few good years I hope people take a longer-term view.’
It seems an increasing number are.
victoria.young@legalease.co.uk