Morgan Stanley eyes return to European senior lending next year

Morgan Stanley is considering a return to European real estate lending as soon as the first quarter of next year with a business plan under discussion internally which could pave the way for an origination model supported by partial syndication for medium to large senior debt loans, CoStar News understands.

While Morgan Stanley does not yet have final sign-off for its revived commercial real estate lending ambitions, the business plans under consideration could be approved as early as the end of the year – along with the precise initial earmarked capital and loan size parameters – which would enable the US investment bank to underwrite loans in the first quarter of next year.

CoStar News understands that an integral component of the business plan is be the willingness to hold a portion of each loan underwritten, reflecting the popular belief in real estate finance markets that business cannot be won on a purely brokerage basis.

Last year, Jefferies attempted such a strategy and is understood to yet close a real estate deal in Europe, while UBS initially tried to launch a “no-balance sheet” model which was initially altered and then finally shelved after deciding on the current impracticality of the strategy.

Morgan Stanley’s expected appetite will be to write senior and stretched-senior loans against core and value-add properties in the UK and Northern Europe, as it prepares to return to a sector in which it has only written two new loans since the global financial crisis, in France during the first half of 2011.

The US investment bank is also likely to seek to participate in club deals alongside other banks and new lenders.

Morgan Stanley declined to comment.

The return to European real estate lending, albeit initially modestly at first, is a reversal of the internally-stated strategy at the turn of the year, which decreed European real estate non-core, CoStar News understands.

However, the tide of investment banks which have long since employed similar post-global financial crisis European real estate lending strategies amid an environment for historic high margins and an opportunity pipeline stretching out for years ahead, is thought to have strengthened the internal resolve to resume lending.

Morgan Stanley’s pedigree in European real estate finance is considerable, with the US investment bank credited for spearheading the commercial-mortgage backed securities (CMBS) market in Europe during the beginning of last decade, with the launch of the first securitisation conduit program, ELOC.

But the near dormant market for CMBS – save for four bespoke issuances in the last 18 months including three by Deutsche Bank and the Royal Bank of Scotland’s rare NPL securitisation, Isobel Finance – has required investment banks to revisit the lending model for investment banks in an effort to drive financing business.

Deutsche Bank has been the most active investment bank in Europe over the last two years, while Citigroup has successfully cleared its legacy book and found a niche and Goldman Sachs has also closed a string of deals, including Blackstone’s acquisition of Devonshire Square.

More recently has been the return and increasing appetite of Wells Fargo, with still a stated strategy of following US clients in London. JPMorgan and Bank of America Merrill Lynch (BAML) have also both returned to lending this year.

European investment banks operating in real estate finance now fall into two distinct categories; investment banks with deposit-taking subsidiaries and those without.

Using five-year credit default swap (CDS) spreads as an indirect proxy for banks’ funding costs, the deposit-taking investment banks have much tighter spreads, indicative of lower funding costs.

CDS spreads are indicative of the risk premium that banks must pay when lending, which makes the metric a useful cost of capital proxy.

Within the deposit-taking pool, those banks with the largest underlying deposit base have the tightest spreads – Wells Fargo, at 85 basis points, followed by JPMorgan, at 115 bps, according to Markit, the financial information services company – which implies they are best placed to offer the cheapest source of capital. (Table left sourced to Markit)

At the other end of the spectrum, in the second banking group which do not have deposit bases, Morgan Stanley’s CDS spreads over five-year swaps is 222 bps, followed by Goldman Sachs with 190 bps, which suggests their cost of capital is higher.

Based on this five-year CDS spread analysis, Wells Fargo’s cost of capital is slightly better than two-and-a-half fold lower than Morgan Stanley’s.

While there are other factors which can mitigate the difference, the analysis demonstrates that the varying cost of capital between investment banks lending to European real estate is polarised.

About CoStar News

Finance Editor, CoStar News
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