Banks’ CRE debt exposure ‘permanently recalibrated to a lower risk model’, says Laxfield

Bank exposure to commercial real estate (CRE) has permanently recalibrated to a lower risk model, reducing exposure and creating long-term opportunity for other capital, according to Laxfield, the real estate debt investment manager, which has coincided with institutional appetite for alternative investments.

Laxfield, in its 9th annual report analysing, inter alia, financing request volumes, pricing, LTVs, provides a barometer for emerging trends in the often opaque and imperfect UK debt market by recording finance requirements at the earliest stage, when borrowers approach lenders seeking terms.

Fiduciary controls between capital, manager and borrower will not be properly tested until a hard or soft property landing occurs, reports Laxfield, but in the meantime, loan origination by insurance and other non-bank capital has expanded to c.25% of the market in five years. Diversification has undoubtedly helped borrowers, but good controls will serve the long-term interests of the market best.

Laxfield identified a number of additional themes across 2018:

  • No Return to Covenant Lite: “Whilst institutional appetite to invest in debt has significantly increased, we do not currently see hunger for deal flow leading to loose controls. Covenants have remained meaningful, with lenders retaining an ability to intervene early if deals go wrong. Expectations around borrower-lender reporting are high. We see hard work and attention to shared risks in getting things done.
  • Debt Liquidity Waxes and Wanes: “The market remains imperfect and opaque, benefiting lenders with strong distribution capability. Bank appetite changes with time of year, and macro factors can create pauses in debt availability – as we have seen in the past three months with the Brexit question unsolved. Pricing accordingly shifts and for debt investors able to move quickly to respond, there is no lack of opportunity – for borrowers at certain points in time sourcing debt can still be challenging or expensive.”
  • The Game has Shifted from London: “The recovering market started in core, but spread out regionally backed by demand for finance. Today our more regionally dominated pipeline reflects an active investment market in the larger cities outside London and the fact that large numbers of assets trade in London without engaging the local secured lending market. Debt requirements are widely spread and borrowers need lenders who understand the economy outside the M25.”

Emma Huepfl, Co-Principal of Laxfield Capital explains:

“Over the five years since we issued our first report, we have seen substantial changes in demand for finance. Strong activity in the regions and mid-market show a healthy depth of activity despite the unresolved political backdrop. As tenants demand more differentiated property, landlords need to anticipate change and be more aware of the need for ‘space as a service’. Lenders need to pay close attention to the operational capabilities of their borrowers and ensure they are capitalised to invest in their assets and maintain occupier appeal.”

Rob Short of the Property Finance Forum, who sponsored the Laxfield UK CRE Debt Market Barometer, added:

“Laxfield has identified changing market features and challenges in areas like retail which need to be properly understood to ensure a successful relationship between debt and equity through the cycle. We are pleased to support this work to broaden the discussion around debt market dynamics and help bring more transparency to the sector.”

Property dinner raises £100,000 for Great Ormond Street Hospital Children’s Charity to redevelop and create world-leading Sight and Sound Centre

The fundraising dinner saw 18 senior leaders from across the property sector in attendance with guests being treated to a drinks reception and three course meal

On Tuesday 29th January 2019, a fundraising dinner was hosted by Michael Abel of TPG and Audrey Klein of Corestate to raise vital funds towards an exciting redevelopment project; The Great Ormond Street Hospital Sight and Sound Centre. 

Audrey Klein, MD International Institutional Clients, Corestate

The Great Ormond Street Hospital Sight and Sound Centre, supported by Premier Inn, will be the first dedicated medical facility for children with sight and hearing loss in the UK. The brand-new Centre, which is due to open in 2020, has been specifically designed to meet the needs of the thousands of children with sight and hearing loss that visit GOSH each year. The Sight and Sound Centre will, for the first time at GOSH, bring together two closely linked clinical specialities of Audiology and Ophthalmology into one dedicated building. These services represent the largest outpatient group in the hospital. A Grade II listed building will house the centre which will feature state-of-the-art testing equipment, a sensory garden and artwork throughout. 

The fundraising dinner saw 18 senior leaders from across the property sector in attendance with guests being treated to a drinks reception and three course meal. Audrey and Michael are long-term supporters of Great Ormond Street Hospital Children’s Charity (GOSH Charity) and are members of their Corporate Partnerships Board.

Guests, including Richard Betts of Real Asset Media, heard moving speeches from Audrey, Michael as well as Stephanie Williamson, Deputy Director of Redevelopment at GOSH, who spoke about the vital importance of this project and what a difference the new facilities will make to the thousands of children with sight and hearing loss that visit GOSH each year. 

Guests also had the opportunity to view a variety of items which were provided by the Ophthalmology team for the evening, including pairs of ‘sim specs’ which mimic particular eye conditions to give a real insight into some of the conditions that affect these young patients.

An impressive £100,000 has since been committed to GOSH Charity, with conversations still ongoing with other attendees to see what more can be done to support this exciting project. With this generous support, the new facility aims to ensure that children with sight and hearing impairments receive world-class clinical care in an environment designed specifically for them.

To find out more about how you can support GOSH Charity and the new Great Ormond Street Hospital Sight and Sound centre, please visit

Laxfield: weight of UK debt financing demand shifts from the capital to regions

Demand for small to medium debt financing shifted from London to the regions, according to Laxfield’s UK CRE Debt Market Barometer, with 58% of all requests for finance last year for regional assets, equating to a total volume of £11.3bn.

Laxfield has been analysing annual UK loan requests since 2012 and has amassed a databank of £130bn worth of loan requests across 2,295 deals, excluding sub £5m-sized loans. Loan requests rose by 29 to 296, reflecting £19.5bn worth of financing requests by borrowers.

Average loan size for deals in excess of £5m was £28.4m, reflects Laxfield’s business focus and different dynamics in market financing of jumbo loans (for which significant volume is secured through private placements, club deals and investment bank underwritten loans).

Demand for finance against London assets was below average in 2018, according to Laxfield, while the pricing spread between London and regional assets across the pool was 22bps. This represents a significant narrowing of the premium which has been available on regional assets in the previous three years (average 52bps). LTV requirements in London were lower than in the regions (62% vs 58%), indicating a marginal greater leverage appetite for borrowers outside the capital.

Laxfield identified several themes across 2018:

  • Debt Not Driving the Bus: “Overall debt supply is strong. Despite this, demand remains steady, and completed lending reported by Cass has been broadly level for the past three years. A combination of borrower discipline, lender regulation and risk appropriate pricing have acted as brake mechanisms to prevent the market ‘taking off’ on the back of debt availability. Capital values may be full, but debt isn’t currently perceived to be the main driver of asset pricing.
  • No ‘Standard Lending’: “Structural change – a constant refrain for real estate investors – but what does it mean for lenders? Single sector, cashflow-based lending is now a rarer commodity, and underwriting debt requires deeper understanding of an equity case and the sponsor’s understanding of property as a service. Obsolescence is happening faster, and repurposing the asset may be necessary to maintain value. The lender’s downside case needs to consider a wider range of outcomes and focus more specifically on the borrower’s ability to anticipate and respond to change.”
  • Shifting Definition of Core: “A marker if any were needed about the problem for lenders in underwriting retail, expected pricing for retail loans has more than doubled in the past four years. An acquisition boom in 2014 with associated debt demand saw pricing tighten substantially, before a gradual sentiment reversion. Fast forward 2017-2018 and lenders’ ability to support borrowers in the retail sector has been severely curtailed (for reasons examined later on). In what feels like the blink of an eye, retail has moved from core to specialist asset class, and battering headwinds show no signs of abating yet.”

The Laxfield UK CRE Debt Market Barometer is sponsored by the Property Finance Forum, who support the work done with real loan data to provide participants with market information.

Laxfield’s analysis continues tomorrow.

‘Great opportunities in Poland’

Developers can diversify their activity in student housing and other forms of residential

Dorota Wysokińska Kuzdra, Partner, Corporate Finance CEE, Colliers International, tells Real Estate Day that developers can diversify their activity in student housing and other forms of residential but they need investors to form joint ventures that will benefit both

Dorota Wysokińska Kuzdra, Partner, Corporate Finance CEE, Colliers International

‘Now it is all about the experience’

The other trends affecting retail are technological innovation and a focus on the customer’s personal preferences

Herman Kok, Head of Research, Meyer Bergman, tells Investment Briefings that the other trends affecting retail are technological innovation and a focus on the customer’s personal preferences Filmed at MAPIC 2018

Herman Kok, Head of Research, Meyer Bergman

Logistics operators’ top global hub remains China despite IP concerns

China remains the favoured country for logistics operators’ global supply chain base, despite rising concerns around protection of intellectual property rights, according to a new index published by Cushman & Wakefield.

Technology sophistication is preserving China’s competitiveness as the pre-eminent global hub as a manufacturing base, while the United States is considered the most attractive for logistics companies seeking to minimise exposure to economic and political threats.

Cushman & Wakefield’s Manufacturing Risk Index (MRI) provides insight into underlying trends in the logistics sector. The index assesses 48 of the most suitable locations for global manufacturers to expand or relocate operations in EMEA, the Americas and Asia-Pacific. Each country is scored against 20 variables that make up three final weighted rankings which cover conditions, cost and risk, underpinned by World Bank, UNCTAD and Oxford Economics data.

China emerged as the leading country at a baseline scenario, which gives equal importance to a country’s operating conditions and cost competitiveness. The United States is in second followed by India, Canada and Czech Republic making the top five. The Czech Republic is the highest ranked European country with Poland, Lithuania and Hungary also featuring highly.

When the data is looked at from a cost scenario – which gives a higher score to countries where operating outlay, including labour costs, is lower – China remains on top with Asian countries dominating the top 10. Only Lithuania and Romania, in seventh and eighth respectively, feature prominently from elsewhere.

The third ranking – the ‘risk’ scenario – takes into account rising geopolitical risk by favouring countries with lower levels of economic and political threat. In this scenario, North America leads the way with the US and Canada first and second respectively and China slipping to fourth. European locations account for more than half the top 10, led by the Czech Republic, which places third in the index, with Germany, Denmark, Finland, Austria and the United Kingdom also featuring in the top 10.

Lisa Graham, Cushman & Wakefield’s EMEA Head of Logistics and Industrial Research & Insight, explains:

“These rankings provide a critical insight into the rapidly-evolving manufacturing landscape and the decision-making factors behind locations. Global manufacturing has entered a new era, marked by the growing influence of technology in addressing productivity, labour shortages and safety in production and logistics.

“We are seeing formerly low-cost locations such as China and India moving up through the value production chain through country-sponsored support of technological adoption. That is why Asian countries featured so prominently in our rankings. There are still concerns over intellectual property issues in the region which mean, that despite higher costs, countries in North America and Europe will continue to thrive as manufacturing bases.”

Source: Cushman & Wakefield

Rob Hall, Cushman & Wakefield’s Chair of EMEA Logistics & Industrial, added:

“We are seeing an element of protectionism and nationalism putting global and regional and supply chains at risk. In Europe, the outcome of the ongoing Brexit negotiations will redefine regional production lines as well as reshape domestic and international flow of goods.

“Countries which invest in platforms that facilitate flows in and out of production lines will succeed. China’s seamless supply chain connections have resulted in substantial investment in infrastructure and multi-modal transport, including the New Silk Road rail and maritime projects, in addition to incentives. These factors are off-setting concerns regarding intellectual property.”

‘Retail is undergoing a big reshuffle’

Retail is not in crisis, but it is changing and becoming more varied and interesting, Josip Kardun, CEO, Multi Corporation, told Real Estate Day.

Retail is not in crisis, but it is changing and becoming more varied and interesting, Josip Kardun, CEO, Multi Corporation, told Real Estate Day. 

‘The main challenge in our industry is that basically our product is changing and we are trying to change with the product,’ he said. ‘The old mantra that big is beautiful no longer applies. Now the trend for shopping centres is smaller, mixed-use and with a variety of offerings’.

Mixed-use means there is a ‘renaissance of community services’, from public libraries to postal services to banking in shopping centres. There are more F&B offerings, which will take up 15-20% of the space, and there are shops, as many retailers may have an internet presence but still need that physical space to sell their merchandise.

‘In Poland we have dancing schools where the parents leave their children for classes while they go and do their shopping,’ Kardun said. ‘We have highly professional medical centres and also co-working platforms coming into the malls, which are becoming the meeting places of the future’.

It is important to think outside the box, he said: ‘You need to reinvent our business to a certain extent, so I don’t call it a crisis but simply a big reshuffle, which will have interesting results. The winners will not be the pure online providers, but the ones who play clicks and bricks the best’.  

Everyone seems to be targeting Millennials living in highly gentrified city centres, he said, but ‘we are providing affordable leisure and shopping for ordinary workers and normal households in the outskirts or the suburbs who would otherwise be shut out. We need to focus on these people again. They may not be the aspirational segment, they may not be instagramming all day, but they still deserve respect and a good experience’.

Multi Corporation is trying to be ‘a full-service platform for Blackstone and a variety of investors like Allianz, Commerz or Deutsche in Europe who are still invested in retail,’ Kardun said. ‘Some believe being a service provider is too much heavy lifting and too low margins, but in reality competition is less and we are increasingly being recognised as a fully integrated full-service platform covering all the bases from architectural services to accounts, leasing and development’. 

Some market participants are withdrawing because they find the sector too tough, but Multi’s investors understand that ‘today is not the best time to dispose of retail real estate and so they are taking the opposite route, investing even more into the sector and trying to create long-term, sustainable value’, he said.

Multi Corporation now has a presence in 15 countries, manages over €11 bn of real estate, has more than 700 employees and, said Kardun, it is becoming a magnet for young talent. ‘The services we provide keep us sharp and vibrant and we are perceived by the young as a great Academy for learning the business with blue chip investors,’ he said. ‘People can then move on somewhere else or develop their career with us further. It is working very well for me and for my management team’. 

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Co-living trend driving innovation in European cities

Micro Living at the moment is mainly a short-term solution of a place to stay during the working week to then return home at weekends, but that may change as lifestyles evolve.

Christian Scheuerl, Managing Director, MPC Micro Living Development GmbH, Rainer Nonnengässer, CEO, International Campus GmbH, Samuel Vetrak, CEO, Bonard and Brian Welsh, Chief Executive Officer, The Nido Collection discuss the current Market for Real Estate investment into the Student Housing sector. Filmed at MIPIM 2019 by Real Asset Media.

Different asset classes will merge under the co-living umbrella, delegates heard at Real Asset Media’s Student Housing & Micro Living Investment Briefing, which took place at MIPIM.

‘More hybrid products will be created,’ said Samuel Vetrak, CEO, Bonard. ‘Student housing and micro-living will converge to cater for young professionals and recent graduates who want to stay on living in the city. They will want bigger rooms for which better rates can be charged’.

Micro Living at the moment is mainly a short-term solution of a place to stay during the working week to then return home at weekends, but that may change as lifestyles evolve. 

‘It is entirely possible that in the near future young professionals in their 20’s or even 30’s really enjoy the co-living experience and carry on living in these buildings even when they could afford their own bigger apartment,’ said Christian Scheuerl, Managing Director, MPC Micro Living Development. ‘We will see interesting things happening in the next few years’.

The UK led the way in Purpose-built student accommodation (PBSA) and other European countries are following, but the same trends can be seen across the Continent. 

‘I have followed the evolution of the UK market in the last 15 years and I think the general consensus is that other European countries will follow a very similar path,’ said Brian Welsh, CEO, The Nido Collection. 

There is increased demand for stylish accommodation, better product and more amenities – the average list now includes game rooms, outdoor areas, bike storage, tv room, storage, gym, laundry room, room cleaning, multi-functional communal rooms. ‘The standard is now 10-15 amenities per building’, Vetrak said.

New PBSA schemes have been designed for international students, but they are now popular with everyone, said Scheuerl: ‘Domestic students are also increasingly demanding and enjoying the amenities on offer. Good design and communal areas are a huge selling point now. You really need to think about the product and try to differentiate yourself from the rest of the market’.

Brands are important, but they must live up to their name and offer what guests have come to expect. 

There is no one-size fits all, Scheuerl said: ‘Each building needs to be a site-specific project. You want to create the same kind of look and atmosphere that goes with the brand, but you cannot have a master lay-out that fits all the categories. Each location needs a new concept and must fit the needs of the tenant’. 

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‘Big demand from private investors for real estate funds’

The trend now is for smaller and more focused funds, that invest in specific sectors, like kindergardens, light industrial or car parks, while large funds that span different countries are now seen as too risky

Michael Schneider, Executive Director, Intreal

Michael Schneider, Executive Director, Intreal, tells Real Estate Day that the trend now is for smaller and more focused funds, that invest in specific sectors, like kindergardens, light industrial or car parks, while large funds that span different countries are now seen as too risky

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LSH: Q1 investment volumes slump to lowest levels since Brexit vote

Investment activity in the UK commercial real estate sector fell to £10.9bn, the lowest quarterly total since the aftermath of the EU Referendum in Q3 2016, according to new data from Lambert Smith Hampton (LSH).

The £10.9bn traded in the first quarter is 26% below average and a substantial 34% below Q4 2018, the largest recorded quarter-on-quarter percentage fall in five years, according to LSH’s latest UK Investment Transactions (UKIT) report.

Heightened investor caution in the weeks leading up the UK’s scheduled exit from the EU has impacted investment activity, LSH reports, as investors delay investment decisions until greater clarity emerges.

The impasse was most clear with larger lot size deals. Only 19 transactions in excess of £100m traded in the first quarter, the lowest number since Q4 2012 and significantly below the quarterly average of 31. More positively, the overall total number of Q1 deals was only 15% below average, indicating a stronger tolerance to current uncertainty across the wider market.

The market was in some respects turned upside down in Q1. For the first time on record, the three traditional core sectors accounted for less than half of volume. Offices took the brunt of the drop-off in Q1, with volume at a 10-year low of £2.7bn, down a substantial 60% quarter-on-quarter and reflecting a moribund period for large-lot size deals in Central London.

Meanwhile, a perfect storm of structural change and Brexit uncertainty saw retail volume sink to its lowest quarterly total on record, at just over £1bn. Industrial volume dropped to £1.4bn in Q1, far removed from the record £2.2bn in Q4 2018 but only 18% below the trend.

Other sectors proved notably more resilient. Hotel & leisure volume of £2.6bn in Q1 was its strongest quarter in 13 years, boosted by a number of portfolio deals and the UK’s largest deal in Q1, Queensgate Investments’ £1.0bn acquisition of the Grange Hotel portfolio. Collectively, the specialist sectors also bucked the trend in Q1, with volume of £2.7bn being 35% above average and fuelled by 12 build to rent forward funding deals.

The heightened caution in the UK market in Q1 was evident across each of the main investor groupings. Quoted property companies were the least acquisitive buyers compared with trend, with volume of £680m at below half the average, followed by UK institutions where volume of £2.0bn was 35% below average. While investment from overseas investors was also subdued by recent standards, tellingly, they remained major net buyers of UK property, to the tune of £3.3bn in Q1.

The All Property average transaction yield moved out by 14 bps in Q1 to stand at 5.48%. While all the main sectors moved out, retail saw the largest outward movement of 68bps to stand at an average of 6.21%.

Ezra Nahome, CEO of Lambert Smith Hampton, explains:

“Q1 turned out much as we expected, with investors of all persuasions opting to take a backseat in the crucial run-up to the UK’s scheduled EU exit date. For the first time ever, the so-called alternative sectors collectively accounted for well over half of total volume, a telling reflection of the direction of travel in the market and the insatiable demand for long-income deals.

“While many will be relieved the UK avoided a no deal Brexit outcome, frustratingly, the EU’s extension to later in the year will only act to preserve uncertainty in the market. Despite the generally sound fundamentals of UK real estate investment, this is likely to prove detrimental to the rebound in volume we had been expecting for the latter part of 2019.”