Newmanor Law Roundtable
Newmanor Law Roundtable
Navigating the new property finance landscape
Westfort Advisors & Newmanor Law co-hosted a roundtable event last week, with a group of lenders, borrowers and insolvency practitioners to discuss the property finance landscape and the challenges and opportunities presented by the current market.
With values in retreat and lenders remaining cautious about the future trajectory of the market, many borrowers looking to refinance are facing a ‘funding gap’ which needs to be plugged by new equity or whole loan solutions. Clearing banks are restricted as to how much leverage they can offer due to interest cover ratios and stress testing parameters, and consequently challenger banks and debt funds are becoming increasingly busy and able to play in a space lower down the risk curve.
Whilst there is general consensus that the base rate has peaked – and may even come down slightly earlier than expected next year (although a number of attendees thought the drop of 0.75% by next summer seemed optimistic), there are still concerns about the economy tipping into recession and the impact of the ongoing crises in geopolitical landscape. Although the number of UK company insolvencies is on the rise, it was pointed out that this is, to some extent, a belated legacy of the pandemic financial ‘safety net’ being removed. As such, the volume of insolvencies – even though it is spiking at present – is actually almost on a par with the long-run average. Also, aside from the few well publicised enforcements on some big ticket assets, the feeling was that we are currently not see a lot of secured lender enforcements. However, this is expected to gradually change and particularly with development sites the situation is acute with around 6,000 contractors in very critical financial health.
The clearing banks are showing restraint in terms of enforcement and may find it more appealing to sell loans to funds who are more aggressive in their approach with defaulting borrowers.
Lenders are conscious that cash for discretionary spend has reduced. Retail and leisure assets are being viewed as essential and non-essential through the prism of Covid. Residential, student and health-care are still seen as solid sectors. The office sector however is facing particular stresses not least because of the new Minimum Energy Efficiency Standards (MEES) requirements around energy efficiency. The cost of retrofitting properties is often economically unviable but without repositioning these assets, many secondary offices will become stranded.
There was discussion of what the next move will be from global investors who continue to raise capital and could be poised for a spate of value-buying across the UK property sectors. In tandem with this, it is widely expected that new debt funds will proliferate and play a key role in transitioning UK property into the next phase of the cycle.
Whilst “Survive until ‘25” is becoming a common mantra across the property sector, it was agreed that neither investors or lenders will just be able to sit out the current difficulties and will have to be proactive in their approach. The key will be full circle advice whereby parties obtain early advice and keep their discussions going between all stakeholders.
£45m bridge loan to facilitate acquisition of Manchester’s historic Corn Exchange
£45m bridge loan to facilitate acquisition of Manchester’s historic Corn Exchange
Specialist lender Cohort Capital has financed the purchase of the Corn Exchange in Manchester, which was recently acquired for an undisclosed amount by a private investor advised by Westfort Advisors.
The £45m bridge facility was secured against the 141,000 sq ft, grade II listed building as well as a portfolio of other mixed-use UK assets. The market-clearing, short-term facility allowed the buyer to leverage their investment at very short notice, affording them the flexibility to procure senior, term-loan financing later this year.
Built between 1896-1903 and most recently redeveloped in 2017, The Corn Exchange is an iconic former market hall in the heart of Manchester’s city centre, comprising a restaurant and leisure venue on the ground, lower ground and first floors, and an aparthotel on the upper floors.
The property has 18 leases with an average lease term of 17 years and, whilst largely stabilised, still offers some scope for improving occupancy and tenant mix to further enhance value.
Richard Herring, co-founder at Westfort Advisors said:
“This is a fantastic outcome for the investor but also for Cohort, both of whom managed to weather some severe headwinds – not least September’s mini-budget – while managing to remain pragmatic and flexible throughout the process. Key to the deal’s success was the diversity of the collateral package, the quality of the Corn Exchange, and the calibre of the sponsor. Special thanks should be paid to our legal advisors at Farrer & Co and to Matt Thame at Cohort, who were instrumental in getting the deal across the line.”
Matt Thame, Founder of Cohort Capital said:
“It’s been an eventful year for the private debt markets. But we have definitely seen an increase in situations where lenders have not performed on their initial debt terms. With this deal, we were able to deliver with certainty and speed – which in the current market goes a long way, especially with acquisition opportunities which have real deadlines attached. Having a reputable introducer and advisor like Westfort assisting with the closing process made the underwrite much more straightforward. Now the ‘Goldilocks’ period of low inflation, rates and growing assets prices has come to an end, having an experienced debt advisor who introduces quality business but also exits existing loans to term debt couldn’t be more important – for lenders and borrowers alike.”
Node closes €30m refinancing of Spanish portfolio
Node closes €30m refinancing of Spanish portfolio
Urban living owner and operator locks in a new facility for collection of boutique residential assets
- What Node refinances portfolio of residential assets in Spain
- Why DRC Savills Investment Management provided fresh loan that also includes a capex facility
- What next Node currently has a pipeline of over 7,000 beds across Europe
Node, the urban living owner and asset manager, has refinanced its Spanish portfolio of urban residential rental assets and ancillary retail with a new facility, React News can reveal.
The loan, structured as a refinancing and capex facility, was provided by DRC Savills Investment Management (DRC SIM). The deal was arranged by Westfort Advisors.
The portfolio includes more than 300 beds in historic townhouses located across city centre locations. Node will continue to operate and further enhance the product after partnering with DesignAgency on the concept and interior design.
Anil Khera, NODE said:
“We are excited to continue our long-standing relationship with DRC and its founding partners, as we prepare for our next chapter of growth”
Mark Gibbard, principal at DRC SIM, said:
“The team is thrilled to have supported Node as they grow their footprint of assets across Spain. This deal underlines DRC SIM’s ability and commitment to deploy our debt strategies into strongly performing real estate assets with experienced sponsorship, such as Node.”
The portfolio refinanced by DRC SIM represents Node’s boutique offering in Spain. Node currently has a pipeline in excess of 7,000 beds across Europe, which includes more than 3,000 units in Madrid, Barcelona and Bilbao with larger-scale development assets opening from 2024.
Richard Herring, Westfort Advisors, added:
“Given prevailing challenges in the capital markets, the successful closing was testament to the attractiveness of the financing terms, the quality of the portfolio and the exceptional motivation and pragmatism demonstrated by all parties.”
Financing of UK regional hotel
Node closes €30m refinancing of Spanish portfolio
Westfort Advisors have negotiated a market-clearing facility to refinance the acquisition and refurbishment of the Staverton Park Hotel in Northamptonshire.
The hotel is owned by Zetland Capital Partners and offers 247 rooms and a PGA European-tour standard 18-hole golf course. It was previously operated as a DeVere but, following the acquisition in 2021, has been rebranded as the Staverton Park Hotel & Golf Club. The competitively priced, stretch-senior loan will refinance Zetland’s initial acquisition and facilitate a significant capex/refurbishment plan across the Hotel and Golf Club.
Nicholas Kalamaras, Head of Hospitality & Leisure at Metro Bank said:
“It was a real pleasure working with Westfort Advisors. The transaction is an excellent one for the Northants county, which will see the owners Zetland Capital providing significant investment into one of the key hotels and golfing complex’s in the area. We look forward to seeing the hotel refurbishments being completed.”
Deepak Drubhra, Co-Founder of Westfort Advisors said:
“Hospitality investors are seeking to optimise returns from operational assets and lenders in that space are being competitive and able to support projects that have strong fundamentals. This funding will allow Zetland to unlock the hotel’s potential as being a leisure destination in the Northampton area and we thank Metro Bank for their support and execution on this market leading financing package.”
€53.5m facility for Threestones Capital with Societe Generale
€53.5m facility for Threestones Capital with Societe Generale
Threeestones Capital has secured a €53.5m facility from Societe Generale to fund the acquisition of six nursing homes in Germany and to refinance two nursing homes in Spain for its TSC FUND – EUROCARE IV investment vehicle. The facility was arranged by Westfort Advisors and is the first cross-border CRE debt financings in the nursing home sector of 2022.
The transaction increases the fund’s portfolio by 800 beds, bringing its current total to over 6,500 beds and nearing €2b AUM The properties are all leased on long term leases to leading care operators.
Threestones Capital, Beka Pipia, Portfolio Manager said
“The specificities of healthcare real estate have guaranteed significant resilience to the asset class during these unusual macroeconomic times, characterized by high inflation, slowing growth and a commodity shortage. We expect the demand by large institutions for the segment to continue to grow as they get increasingly allured by the inflation-indexed cashflows and affirming demographic trends.”
From Societe Generale, Fernando de Galainena, Head of Real Estate Structured Finance Spain stated:
“We are delighted to have accompanied Threestones Capital in this financing. This is the first transaction of Societe Generale with Threestones Capital and our idea it to continue supporting them with their healthcare strategy around Europe.”
Deepak Drubhra, Co-Founder of Westfort Advisors said:
“Our team is delighted to work on this transaction with Threestones to deliver a cross-border financing solution. We are confident that this structure will enable them to increase their portfolio across Germany and Spain. We are also grateful to the Societe Generale team for their support and pragmatism throughout the process, and execution of a market clearing financing package.”
Threestones Capital were advised by K&L Gates (Legal, Germany), Pavia-Ansaldo (Legal, Spain), Auxilium Financial Risk Management (Hedging) and Westfort Advisors (Debt Advisory).
Societe Generale were advised by Ashurts (Legal), Euro Transaction Solutions (Insurance Advisory) and Savills (Valuations).
Debt facility for hotel portfolio in Spain
Debt facility for hotel portfolio in Spain
On behalf of a London-based Private Equity firm, Westfort Advisors has successfully arranged and structured the financing of a portfolio of hotels located across Spain.
The transaction forms part of a wider value-add strategy to recapitalise, reposition and rebrand under-managed but well-located resort hotels. The competitively priced financing package further enhanced returns on a portfolio, which had been acquired at an attractive entry yield on historic (pre-pandemic) EBITDA and which is very well placed to benefit from operational and market recovery over the next 4-5 years.
Many thanks to our partners at BentallGreenOak for their pragmatism and drive throughout the deal.
£40m loan to facilitate Zetland Capital’s UK pub portfolio expansion
£40m loan to facilitate Zetland Capital’s UK pub portfolio expansion
Zetland Capital, advised by Westfort Advisors, has kickstarted an expansion of its portfolio of pubs across London and the south of England with the acquisition of five establishments, including three in Brighton, with a £40M facility provided by OakNorth Bank, the UK bank for entrepreneurs, by entrepreneurs. In addition to the three pubs in Brighton, the deal will see the acquisition of properties on Hayling Island in Hampshire and in Woodford Green, Essex.
Zetland Capital’s portfolio of pubs, which is operated by Portobello Brewery, includes the flagship Westow House in Crystal Palace, which has recently added 22 ensuite bedrooms, along with other locations including Effra Social in Brixton and Pratts & Payne in Streatham.
Deepak Drubhra, of Westfort Advisors, said:
“Despite the impact of the pandemic on the leisure industry, this transaction demonstrates there is a long-term confidence in sector recovery and high demand for innovative and entrepreneurial operators with a diverse and high-quality offering. Based on Zetland and Portabello’s strong credentials, Westfort have delivered an optimal financing solution with OakNorth Bank to finance the acquisition of this portfolio and support further expansion.”
Deepesh Thakrar, Senior Director of Debt Finance at OakNorth Bank, continued:
“At OakNorth Bank, we don’t take a broad-brush approach when it comes to analysing a business. Even in challenged sectors, there will always be strong businesses, so we see this is as a good opportunity to support a strong sponsor with a portfolio of pubs in good locations, run by a well-regarded operator.”
Mark Crowther, Executive Chairman of Portobello Starboard, said:
“We are delighted to have completed this acquisition and to partner with Zetland Capital. Zetland’s backing will enable us to invest in these great pubs and our fantastic teams, supporting the recovery and to acquire further pubs in the South of England. Given the challenges pubs have faced over the last two years, there aren’t many lenders who would consider supporting the sector at the moment. However, through looking at the portfolio’s past performance, as well as taking a forward-look view of its future potential, OakNorth Bank was able to put together a facility which will keep these pubs thriving and enable us to further expand the portfolio.”
Zetland Capital Partners on UK Hotel Acquisition
Zetland Capital Partners on UK Hotel Acquisition
The acquisition, for an undisclosed sum, is one of the largest hotels transactions completed outside of London in 2021; the hotels will be managed by Zetland’s JV partner, Hamilton Hotel Partners.
This was a complex transaction, executed against prevailing uncertainty in the hotel sector and under considerable time constraints. We are delighted to have been involved in such a successful financing – made possible by the pragmatism of all parties, in particular Zetland, Hamilton Hotel Partners and Starwood.
Westfort Advisors acted for Zetland Capital Partners LLP (Zetland) as the sole arranger of an acquisition and capex facility, underwritten by Starwood European Finance Partners Limited (Starwood); enabling the purchase and repositioning of the 338-bedroom Macdonald Manchester Hotel and the 156-bedroom Macdonald Holyrood Hotel in Edinburgh.
Future of PRS
Chaired by Professor Andrew Baum (’Future of Real Estate Initiative’, Said Business School); Westfort Advisors and Beaumont Bailey hosted senior leaders from across the PRS sector, including Sir Stuart Lipton (Lipton Rogers), Richard Jackson (Apache Capital) and Rachel Miller (Grosvenor), for a candid discussion on ‘The Future of PRS’.
The discussion featured personal insights with respect to key challenges facing the sector and thoughts as to how best to meet the demand for quality rental accommodation across the various submarkets. Currently, despite investment into the UK’s PRS reaching a record total of £3.1bn in 2018, (up 33% from 2017), the sector is still substantially lagging in institutional investment compared to the US and Europe.
Resilience of PRS
Covid-19 continues to have a significant impact on the real estate industry and particularly retail and office sectors. Cushman and Wakefield reported leasing volumes were 20% below average for office space in London at the end of Q1 2020. Similarly, ‘Re-leased’ reported that across their portfolio of 65,000 retail assets in the UK, 48.0% of rent due had been received 10 days after the March quarter date, which contrasts to an average of 74.9% collection from the last two years. Across UK commercial property as a whole, 67% of rent had been paid 60 days after the deadline. This compared with a figure of 84% for the December 2019 quarter.
Conversely, owners of PRS schemes around the table, acknowledged a continued demand across their portfolios, with take-up only marginally down (year on year) and rent collection above 95%. Recent changes in living and working regimes, coupled with reductions in higher LTV lending may be factors. In the longer term, forthcoming restrictions to the ‘Help-to-Buy’ scheme and the impact of a recession on affordability may see a decline in mortgaged owner occupation and an increase in demand on PRS.
However, it is important to caveat that the true resilience of the sector will be tested over the next few quarters.
Fundamentally, the lack of housing supply and issues surrounding affordability are a regional issue; not a national one. In London, housing prices have risen the most across the UK, by almost 59% since the 2007 to 2008 peak. Furthermore, the ratio of median house prices to median earnings in London, has risen from c. 5.5x in 2002 to 13.09x in 2018, automatically pushing those dreaming of home ownership within London into the rental sector, which has responded by offering a spectrum of product offerings across attractive locations, with on-site amenities and the promise of community.
Impact of COVID-19 on Consumer Behavior
The consensus around the table was that employees want flexibility (as they always have); however recent events have shown that, for many, working from home has not impacted on productivity and flexible working is likely to increase. Landlords across the table therefore acknowledged that a key question for PRS landlords is how they position their assets to cater for the well-being of their tenants, their appetite for on-site leisure and community, the general convenience for working from home and the optionality to walk to work.
Increasing on-line interaction and WFH will arguably contribute to the growing societal issue of loneliness. People are generally social creatures and will ultimately seek physical, social interactions and the spirit of community. PRS schemes can be designed to help foster a sense of community and this is where participants saw the sector playing an important role.
If COVID-19 truly has catalysed significant shifts in work practices, other communal offerings will arise in its place. Many of the participants agreed that now is the time for accelerated growth within PRS schemes to meet a new type of social need.
Impact of COVID-19 on Institutional Investors’
Following the European precedent, there is great potential for the PRS market to grow in the UK. Switzerland, for example, accounts for a PRS ratio of over 50% and Germany over 40% of total dwellings, much higher figures than England’s 17%. Some of the reasons our roundtable put forward for this lack of institutional interest has been around the inability to scale due to political focus on homeownership, tax regulations, finite availability of suitable land plots, a disjointed planning policy and complex planning process. However, PRS resilience throughout the lockdown period (if that turns out to be the case) is likely to spur further interest from institutional investors, as they pivot away from office and retail sectors.
Bottlenecks to Growth
Short-term
Westfort Advisors provided an insight on the state of the real estate finance market for PRS and where potential bottlenecks may arise. Essentially, there is still significant illiquidity in the debt markets; banks and institutional funds are only just beginning to look at completely new originations, albeit very selectively. However, in the short term (and certainly beyond), there will be availability of senior financing for the right opportunities and the right Sponsors, given the strong markets fundamentals.
Large/scalable schemes, managed by top tier Sponsors certainly remain attractive to insurance backed lenders, German Pfandbriefbank and clearing banks, who can offer senior financing at c.55%-60% LTV.
However, given that prime yields broadly range from 3% for Prime Central London to 4.5% for Prime Regional Cities, higher leverage debt or debt from higher risk/return lenders (debt funds) is often unviable. Many debt funds are also unable or unwilling to consider the relative complexity and risk of financing the development of smaller schemes, which will prohibit smaller scale developers.
Given the prevailing uncertainty in the market and the construction and operating risks associated with developing PRS, lenders are becoming increasingly selective with respect to the caliber and track record of the Sponsor, in addition to the viability of the proposed scheme.
Long term
Further bottlenecks mentioned by our guests centre around the availability of land, and in turn the feasibility of PRS schemes. Due to regulations and the barriers to entry created by complex planning rules, the risk of locking in capital over prolonged periods has impacted upon the feasibility of affordable PRS schemes. Current processes, lead times and long-return windows create a competitive edge for BTS developers who can take money off the table quickly, as well as larger players who have the resource to wait out long lead times.
Vertical Integration
There is also a case that misalignment between developers and operators can negatively impact the type of product that the PRS world is trying to achieve. For developers, the aim is to recycle capital as soon as possible and move onto the next scheme, ultimately creating an environment where there is less focus on the long-term durability of the schemes, or how the building caters to promote community and amenities. This is of critical importance to operators aiming to reduce tenant turnover, maximise the tenant experience and, in turn, to justify higher rents.
One solution to overcome this, as suggested by the table, would be to look at vertical integration from cradle to grave. Whilst the vertical model allows full capitalization on the spectrum of monetizable activities within the PRS world, it is incredibly difficult to execute with many players lacking the necessary skill-set to execute each piece across development, brand, lettings and management with ease. Beaumont Bailey suggested that this is where talent acquisition is key. In order to spot those with the relevant skill sets within hospitality, to move across to the property sector with the revitalized skill set more geared towards to the BTR offering. In addition, the end-to-end product and investment required is not feasible without scale, given the fixed cost associated with each piece of the puzzle.
Broader Socio-Political Elements
It was highlighted within our discussions, that we need to perhaps re-evaluate who the target consumer is for BTR schemes. Those planning future projects need to be clear on which segment of the population this would best serve. Given the social constructs and schema within our society, it is highly unlikely that an individual would choose renting over ownership long-term, if they have the capabilities to purchase a home. As a collective, we view homeownership as the pinnacle to work towards and a marker of affluence. As highlighted by one of our guests, our government places great encouragement of home ownership, and therefore introduces schemes to help facilitate this. Nations with higher percentage PRS, have an alternative culture to this, however this is due to the state of their rental market, being different to that we experience in the UK. Many European countries receive greater protections for tenants and less impetus on the marvels of home ownership. If new PRS schemes can evolve, to provide all they are promising, in regard to amenities and top property management and hospitality; and the government introduces legislation more geared towards protecting tenants, rather than landlords, we too may see a shift in culture. In addition, the cost of living in owned property is cheaper than renting in most locations. It’s often a practical economic decision for those who have the choice. By making land and planning more accessible, the cost of renting can decrease, reducing the economic arbitrage between the two options.
Conclusion
In summary, the sector will adjust to the challenges posed by COVID-19 and the change in our behavioral patterns. As one might suspect, the need for beds and homes, even during the crisis, has not gone away and to date, PRS has shown to be resilient vs other sectors. Investors will continue to offer a wide suite of amenities in their schemes to meet demand, and they remain buoyant for the sector. This could be a pivotal moment in the PRS sector which is well positioned to capitalise on the availability of debt and equity which is seeking a home away from other sectors (such as retail and hospitality) that face much more challenging times ahead.