Pan-European investors taking comfort from the first signs of recovery in the markets of March were caught out by an icy blast hailing from the west. Massive amounts of customer withdrawals had provoked the crash of Silicon Valley Bank in California, followed swiftly by the failure of its US-peer Signature Bank.
But on closer shores, institutions proved no more secure. Days later, banking group UBS agreed to take over its Zurich-headquartered peer Credit Suisse in a £2.65 billion deal pushed through by Swiss authorities to calm the markets. Although swift action seems to have swerved a collapse that could have triggered a tsunami of banking failures, a leap in Swiss National Bank sight deposits suggests that both Credit Suisse and UBS may have taken large chunks of emergency liquidity to secure the merger, as reported by Reuters. And real estate investors know too well that when banks are saved, there are always accounts to settle at a later date.
Rising financing costs
The latest round of banking tremors has come in the wake of a year of rising swap rates and increasingly expensive financing for players in commercial real estate. A new European lending report published last week reveals that borrowers are now paying up to 6% all-in interest for loans on prime European properties, compared to just 2-3 per cent a year ago. Opportunistic or repositioning assets are priced 60-100 bpd wider.
The Bayes Business School European Commercial Real Estate Lending Report shows that in Europe, German bank lenders still offer some of the highest loan-to-value (LTV) for investment assets (between 75-80 per cent) and loan-to-cost (LTC) for development lending (between 77-82%). Other European bank lenders have been more conservative (between 55-60 per cent LTV and 60-75 per cent LTC).
Loan size also matters. Smaller loans might be priced higher because there is less lender appetite, as well as very large loans (up to €100 million), which might require more than one underwriting lender. The typical sweet spot is between €20 and 50 million, which attracts the lowest and most competitive lending rates (between 1.5-2.5% variable margin rate for a five-year loan term plus Euribor).
Importantly, the loan trend is finally having an impact on prices. "Where property yields for prime offices have been ranging from 2.75% to 3.5% the level of financing rates cannot be sustained and are forcing property values down or leaving assets and borrowers stranded," notes the research, authored by Nicole Lux, senior research fellow at Bayes Business School.
Non-traditional lenders
Amidst this gloomy outlook, there are some bright spots for equity players as values soften, and for hospitality buyers pursuing debt in the alternative space. “Finance is still available to hotel real estate investors,” affirms Patrick Saade, senior managing director of JLL’s EMEA hotels and hospitality division.
“It’s a misconception to think it’s not. In addition to traditional lenders, new lenders have set up shop to fill the gap, from private credit to private equity players.”
Cheyne Capital is one lender which is expanding in the hospitality space. Last month, the alternative asset manager provided a €62 million senior loan to Samla Capital Oy to finance the redevelopment of The Hotel Maria, a luxury hotel located in the heart of Kruununhaka, Helsinki. The project represents Cheyne’s second real estate transaction in Finland.
Daniel Schuldes and Michael Fournier of Cheyne Capital said: “As a firm, we continue to see attractive lending opportunities in the luxury hotel sector as consumers seek out enhanced lifestyle experiences. We’re therefore proud to support Samla Capital Oy with the financing of this prestigious project and look forward to the delivery of a world-class hotel in Finland.”
Added Samppa Lajunen, founder and portfolio manager of Samla Capital Oy: “Luxury tourism is a growing market and the demand for hotels that meet this need is also emerging across Finland. We are pleased to be partnering with Cheyne Capital, who understands the value of The Hotel Maria's concept and the luxury hotel sector.”
The finished hotel will consist of 117 rooms, two restaurants, two bars, a spa, a gym, a ballroom, and a small chapel, and is expected to launch in December 2023.
Green loan options
Other hospitality firms are finding success in the green loan space. Recently, citizenM secured a dual currency €243.3 million and £201.7 million sustainability linked loan (SLL) facilitated by HSBC UK and HSBC Continental Europe, ABN AMRO Bank and Aareal Bank.
By refinancing existing debt as a SLL, citizenM has tied its funding to specific environmental, social and governance (ESG) targets, which include reducing operating CO2 emissions and improving existing green building certifications across its European owned hotel assets. CitizenM, which operates 31 hotels across nine countries and 18 cities, said it was one of the first European hospitality businesses to adopt the SLL funding structure.
Fred Bos, head commercial clients sector, sustainability and E&E expertise at ABN Amro, sees the ”cooperation as a positive step towards the prevention of climate change and as an opportunity to grow our loan book in a responsible way”. He adds: “We look forward to scaling what we have achieved with this financing structure more widely across the highly attractive hotel industry.”
For Saade, too, fears over retreating bank financing may currently be overstated. “Financing is more expensive today if we look at swap rates linked to Euribor. Yet the right asset and the right sponsor are still going to get quite aggressive financing from the banks,” he notes.
“The right asset but an unknown sponsor can still obtain financing if they can supply a guarantee. For anything that is more exotic and more complicated, the gap is being filled by the credit funds and private equity. Specialist credit funds are excited as they know there is a gap to fill - we have been very active matching lenders to investors in that space.”
In conclusion, he notes: “Whoever has a refinancing event approaching will be hoping that their cash flow has caught up as they still might have to put equity down.
“But we are not seeing a huge wave of distress on the horizon, although some high-levered owners will have to sell at some point.”