Real estate owners are increasingly looking at sale-and-leaseback structures as an alternative form of financing their operations, Karolis Adlis, executive director European investments at WP Carey, said during a panel discussion on debt financing held earlier this month at EXPO Real in Munich.
“Over the summer we worked on one specific deal for a company who had a bond maturing in the autumn and was facing a tight timeline to repay the debt. We’re not yet super busy doing deals – it takes time for them to come about, but we definitely see an increase in inquiries from companies and potential sale-and-leasebacks coming to market,” Adlis confirmed.
Many sale-and-leaseback deals revolve around manufacturing or other types of operational assets, enabling the owner to free up funding for investment or to pay down their debts, he added. “These assets are typically let on 20-year leases by companies with a strong credit rating. Very few banks are willing to lend on manufacturing assets, but these properties are mission critical, and the business cannot operate without them so it’s a perfect investment for us.”
The rapid rise in interest rates over the past 18 months has ushered in a new cycle and investors are still adjusting to the new market conditions, Adlis said. “Pricing of real estate transactions has not managed to follow the speed of increase in the base rates. Europe is known to be slow to adjust to new rates and is definitely lagging the UK which is why there’s a lack of transactions at the moment. Sellers are slow to react and that’s directly affecting our business too.”
With base interest rates in Europe currently hovering around 4%, the market is starting to settle, however, according to Duco Mook, head of treasury and debt financing EMEA at CBRE Investment Management. “I think in terms of where we are in the cycle, we have definitely entered a next phase since the ECB announced it has most likely had its final hike. I think interest rates will definitely be higher for longer and we have probably reached a new normality.”
Assem El Alami, head of real estate finance at Berlin Hyp, also subscribes to that view. “We agree that interest rates will be higher for longer.”
While some real estate sectors such as offices still have some way to go in terms of repricing, others like retail have already seen a significant correction, he added. “We see that many of our clients have been quite wise, so to speak, in foreseeing that they will have to put in some more equity to stabilise their investment. So in eight out of 10 cases of covenant breaches, we see there is a willingness to find a solution in that way.”
The good news in terms of distress in the non-listed real estate fund sector is that average loan-to-value levels have dropped significantly since the global financial crisis (GFC), according to Iryna Pylypchuk, director of research and market information at INREV, the association of non-listed real estate investors in Europe.
“The average leverage in INREV’s European fund index – which covers between 350 to 400 funds – has dropped to an average of 23% versus what was 40% at the top of the global financial crisis.”
El Alami at Berlin Hyp confirmed distress levels are relatively low: “I’d say that in one out of 10 or maybe even 20 cases, we may encounter difficulties and will have to work things out in some way.”