the Real Estate Investment profitability with the Financing?
Debt Market A Diverse Originating Lender Audience Existing Market Players New Entrants Lenders with a foothold in certain markets with scarce competition Mainly be local banks with deep understanding of their markets Local banks are the most active in ticket sizes less than 50m From 2013 more than 20 new Lenders arrived to Spain Insurance companies, debt funds, hedge funds and other investment institutions They are active across Europe, with different strategies than local banks: Finding a niche, i.e. complex refinancings, value-add / secondary assets, developments / refurbishment Underwriting large ( 50-100m+) loan tickets Aggressive origination, loan structures and pricing Acquisitions of performing loans and loan origination platforms
Types of Lenders and Motivations / Parameters 1 2 3 4 Established Banks & IBs Insurers Managers / Debt Funds Debt Capital Markets Driven by RoE on Basel III Tier 1 Equity The most flexible source of debt Loans from 5m to 250m+ Still cautious May syndicate in secondary markets RoE on Solvency II capital Longer term asset and liability matching International insurers able to provide up to 250m+ loans which can be kept entirely on balance sheet Can have significant prepayment penalties in the form of Make Whole Unconstrained by Basel III, but typically less flexible on pricing, mandate dependent Look for attractive cash return where income return has been guaranteed to investor Sources of capital available for senior, mezz and whole loans Private placement markets restricted to strong sponsors looking to raise 100m+ CMBS markets remain variable in Europe although investor demand is strong Sufficient 150m + quantum required to justify securitisation costs Typically 10m - 50m quantum
Has there ever been a better time to borrow? Europe: Cost of Funds 5 year Swaps Europe: Prime Margins 5 year debt 8% 7% 6% 5% 4% 3% 2% 1% 0% Euro 5 Yr Swap 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Massive Pump Priming by Central Banks has injected unprecedented liquidity into the banks and largest multi-managers This increased money supply has led to competitive pressure on margins All-in cost of finance remains low throughout Europe Margins above costs of funds have progressively reduced from recession in recent years Spain pricing has stabilized with margins for best lending between 150bps 225 bps at 50-55% LTV (from 350-500 bps in 2010-2013) 800 bps 700 bps 600 bps 500 bps 400 bps 300 bps 200 bps 100 bps 00 bps 2010 2011 2012 2013 2014 Germany France UK Spain
Development & Refurbishment Finance Development Refurbishment Pre-let Speculative Pre-let Speculative Can be raised given the right sponsor and project Possibly in very core markets Not observed but possibly in very core markets Not observed but possibly in very core markets In core locations Non-recourse development finance remains challenging to source throughout Spain Where Lenders are able to provide finance would generally be schemes in core locations Lenders are more comfortable with refurbishment finance, where well known existing assets are brought up to Grade A standard in a market with a shortage of supply
Case Studies Some completed Debt Financings in 2015 Marineda Shopping Centre Client: ALLIANZ REAL ESTATE, as lender Borrower: MERLIN Properties Socimi. Loan amount: 134m Loan structure: 10 years bullet, contributed to improve substantially the leveraged IRR As Termas Shopping Centre Client: LAR Real Estate Socimi Loan amount: 37.5m Improved significantly upon original terms offered to client by other Bank Loan structure: 5 years bullet, contributed to improve substantially the leveraged IRR
Case Studies Debt Financings mandated to JLL in 2015 Hotel Acquisition Finance Asset: Trophy Hotel Initial yield for the purchase was 4.7% JLL Debt Advisory achieved financing terms from a Bank Club Deal who increased the leveraged IRR to 15.3% Urban Shopping Centre Redevelopment Deal: refinancing of a dominant shopping centre Initial yield was 6.3% We achieve terms with the aim to increase the leveraged IRR to a range of 14.5% - 15.5%, depending on loan structure and final conditions
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