Emerging Trends in Real Estate® Europe 2012 - PwC

tice at the peak of the market of agreeing to enter into swaps
that are longer than the life of the loan, sometimes by a significant
period. Furthermore, some closed-end funds entered
into swaps that are longer than the life of the fund. Lenders
are reluctant to take action that would trigger break costs and
losses, particularly as the beneficiary of the upside is often not
the original lender.
The Opportunity. The process of deleveraging coupled
with an environment in which new debt will be significantly
less available creates opportunities both for those with
equity to deploy and for those who could potentially become
new providers of debt. As one equity investor commented:
“Borrowing is hugely challenging at the moment, and the
banks are under massive pressure to offload assets. We do
not rely on leverage to buy assets, although we do look at
existing debt as an asset when the opportunity arises. We see
debt as a strategic tool rather than a way to generate returns.
The current issues affecting the banks are an opportunity for
us in two ways. Firstly, we think that there will be a significant
increase in the rate of disposals by the banks, particularly of
loan books. This is a market in which we can participate. The
pressure on the banks is also reducing the amount of available
debt in the market. This impacts more dramatically other
buyers who are more reliant on debt than us. We see a market
in which the lack of availability of debt and the pressure on
banks create both a buying opportunity and a reduction in the
level of competition.”
Consensus was almost universal among those interviewed
that the pressure on the banks would create opportunities
for others to become providers of debt. However, significant
differences of opinion existed as to the detail: who, how much,
when, and on what terms?
New Sources of Debt. In the opinion of many of those
interviewed, the most immediate opportunity appears to be
the provision of mezzanine debt. The retreat of the banks is
opening a gap in the capital structure. When senior lenders
were providing debt at 80 percent or even higher LTV, few
borrowers needed mezzanine debt. Risk aversion and regulation
pushing banks down to LTVs of 60 percent or lower are
creating an opening. Interviewees, including the mezzanine
providers themselves, cited two major concerns. First, the
mezzanine lenders need active senior lenders behind whom
to provide mezzanine product. Several of those interviewed
expressed the concern that the retreat of the banks could turn
into a rout, leaving the mezzanine lenders in an exposed position
rather than tucked into a snug gap in the capital structure.
The other concern is pricing. If return expectations for equity
are falling, then the population of potential mezzanine borrowers
will also decline unless mezzanine expectations are
reduced correspondingly. If not, the main role of mezzanine
and preferred equity will be in restructuring situations where
the borrower has little alternative.
Chapter 2: Real Estate Capital Markets
One interviewee summed up the situation as follows: “I
see it as ideal for closing the gap in a bull market. I don’t know
why if you are a borrower, you want to take on that sort of risk
given general lack of clarity in the market. Most activity is
focused on people who are desperate. You don’t do mezzanine
unless you are very clear of the outcome, and it is not
easy at this juncture to be clear of the outcome.” The other
comment from a number of interviewees is that the amount of
capital raised to provide mezzanine finance is relatively small,
particularly in comparison to the amount by which the banks
need to deleverage.
Another major topic of discussion in interviews was new
providers of senior debt. A number of large insurers had
already entered the real estate debt market during 2011. The
view was widespread among interviewees that the number
of lenders and the scale of lending would increase; insurers
would be attracted by the commercial opportunity provided
by the departure of the banks and the benign treatment of
real estate lending by insurers under Solvency II. The general
view among interviewees, including the insurers themselves,
is that the amount available for lending will be significantly
smaller than the void left by the departing banks. Insurers
themselves held a diversity of views as to the type of lending
they would do. Some saw themselves as actively originating
lending opportunities whilst others saw themselves lending
by participating in larger syndication opportunities. The terms
on which insurers would lend were also a matter of debate.
The majority view was that the insurance companies would
want to provide long-term fixed-rate loans that would better
ExHIBIT 2-7
Views on Capital Deployed in Real Estate
Investments in 2012, by Business Type
Institutional/Equity Investor
Fund/Investment Manager
Increase Stay the Same Decrease
68% 14% 18%
61% 30% 10%
Publicly Listed Property Company or REIT
45% 41% 14%
Private Property Company or Developer
45% 39% 15%
Bank, Lender, or Securitized Lender
24% 38% 38%
0% 20% 40% 60% 80% 100%
Source: Emerging Trends in Real Estate Europe 2012 survey.
Emerging Trends in Real Estate ® Europe 2012
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