Capital markets remain hostile to property investors
LONDON (Reuters) - Deal-hungry property investors will need to forage hard in all four quadrants of the capital market if they are to survive an extended mortgage famine that may permanently alter the way many buyers structure deals.
At the Reuters Real Estate and Infrastructure Summit this week, senior real estate executives said capital markets will remain hostile environments for the foreseeable future, forcing borrowers to do more business with debt funds and equity partners, and rally reluctant banks into club loans.
"One of the reasons why the challenges faced by banks over-exposed to UK real estate hasn't quite manifested itself in the dire way we were all concerned about a year ago has been because more private equity has been made available to real estate," PRUPIM Managing Director Martin Moore said.
"This is a trend I see continuing," he said.
Risk appetite has shifted downward again since sovereign debt concerns engulfed the Euro zone, raising prospects for a new freeze in interbank credit markets and encouraging some banks to stall on fresh real estate lending plans.
Reflecting this, the property units of several cash-rich institutions including France's AXA (AXAF.PA) are plotting to launch debt funds to fill a void left by capital-strained banks.
Dennis Lopez, Chief Investment Officer of AXA Real Estate, told Reuters his company would likely have 1.5-2 billion euros of capital for senior debt lending.
"Many banks who were aggressive pan-European real estate lenders, especially out of the UK, are former shadows of themselves today. So it is great opportunity for us and we plan to capitalize on that fully," Lopez said.
"In 2007, people lent at inflated prices, 75 percent loan to value at spreads under 100 basis points but you can lend today at prices that have dropped 30-50 percent ... and get spreads of 250-300 basis points on large deals," he added, describing potential risk adjusted returns as "tremendous."
Chris Grigg, chief executive of UK real estate investment trust British Land (BLND.L), said listed developers and property companies should consider tapping shareholders on occasion to offset an unhealthy dependence on bank finance.
"What our investors have tended to say to us is if you see an opportunity that is too big for the existing capital, come and talk to us. We don't see anything out there at the moment that we would not be comfortable with, but we never say never."
Kyle Mangini, global head of infrastructure at Australia's Industry Funds Management also flagged up potential to source finance through corporate bond issues, although speakers largely agreed that securitization markets -- a fruitful source for capital in the boom -- were likely to remain out of commission.
European Central Bank board member Jose Manuel Gonzalez Paramo reiterated the importance of a revival in securitization as Euro zone banks looked to refinance an 800 billion euro debt pile over the next two years.
Grigg, a former Barclays and Goldman Sachs banker, said banks were slowly edging back to real estate lending, but only the most creditworthy borrowers were likely secure the debt they needed, and even that would come at a cost.
"The larger companies will be OK ... but other companies will have to be more equity financed than before. I don't think that is a surprise nor do I think that is a bad thing," he said.
Partnerships and joint ventures will become an even more popular tool to facilitate deal making in the property market going forward until banks reshuffle their exposure to troubled real estate and access to mortgage credit improves.
Morgan Stanley-backed mall developer Multi Corporation said club deals, on both equity and debt, would help investors to make the most of opportunities in today's sharply repriced property market.
"If you are willing to bring more banks to the table so that no bank has to take a ticket of more than 50 million euros, they will talk to you," Multi Chief Executive Glenn Aaronson said.
(See www.reutersrealestate.com for the global service for real estate professionals from Reuters)