Aareal Bank has raised its commercial real estate (CRE) lending appetite with a target to close up to €7bn in new business and renewals this year, as the bank’s confidence grows in core markets and sovereign debt crisis fears begin to ease.
The German pfandbrief-funded bank incrementally grew in optimism over the course of last year, after issuing a cautious tone 12 months ago warning of a “continued volatile and uncertain environment”which would restrict its lending.
Over the course of the year, Aareal Bank’s fears rescinded and the bank ended last year lending €6.32bn – comprised of €3.33bn in renewals and €2.99bn in new business – predominantly across Germany, ‘core’ stabilised European markets including the UK, and the US.
This global lending haul – comprised of €3.34bn in the four quarter alone which was more than the second and third quarters combined – was almost €1bn ahead of the upper end of Aareal’s €4.5bn to €5.5bn guidance 12 months ago.
Aareal’s deal flow last year included:
- a €162.5m slice of a €650m senior debt facility refinancing Stadium Group and the Canadian Pension Plan Investment Board’s joint venture €1.3bn Centro shopping centre in Oberhausen along with Allianz Real Estate and Heleba Landesbank Hessen-Thüringen;
- a share of the €400m four-bank refinancing of CeGeREAL’s matured Opera France One FCC CMBS, secured by three prime Paris offices;
- a share of the three-bank club deal financing Brookfield Office Properties acquisition of 99 Bishopsgate with £150m five-year senior loan, alongside Wells Fargo and Santander.
However, the last year’s CRE lending was still below 2010 and 2011 annual totals, which were €6.68bn and €8.03bn, respectively.
Aareal confidence is driven by confidence in the property and economic fundamentals of the core markets, as well as a belief that the worst fears of the Eurozone debt crisis are easing.
The bank’s forecast for capital value changes in respect of its loan exposures are for an uptick in Denmark, Russia and Turkey, while stable for Belgium, Czech Republic, Finland, Germany, Poland, Switzerland as well as the UK and Paris.
The rest of France is deemed likely to see capital depreciation, along with Italy, the Netherlands, Spain and Sweden.
Aareal’s forecast for CRE lending this year is between €6bn and €7bn. While guidance is not given as to individual market breakdowns, the new business component for the last two calendar years for Northern Europe – for which UK is the dominant individual market – was 14%.
If this 14% weighting is repeated in 2013, this implies that new business for Northern UK could be around the €980m, of which the majority will be UK CRE lending. In addition, there will be a proportion of UK CRE loan renewals, which in the last three years have reflected between 60% and 37% of total lending.
In a presentation to analysts this morning, Aareal said that its business plan for CRE lending is to originate loans at max 70% LTV, but with a target average slightly lower at between 60% and 65% LTV.
Gross loan margins of at least 200 basis points will be sought net of foreign exchange costs, where applicable.
The “three continent approach” business plan is to focus on markets with “short-term or low negative swings throughout the financial crisis and at least a stable mid-term outlook resulting in low risk weighted assets (RWA) consumption”.
Aareal will also seek to the long term run-down of portfolios with higher LTVs or those loans which are secured in markets which it considers has negative outlook. The benefit of which will be an incremental decreasing RWA and its exposure ratio to non-core markets, while freeing up equity.
The bank also said it will look to continue to “strengthen client relationships by leveraging new business through stronger co-operation via club deals and syndication to produce a higher origination capacity for our clients”.
The net change in Aareal’s Commercial real estate loan book at the end of 2012, after loan maturities, renewals and new business, was a €700m reduction to €23.5bn – which includes €200m of property loans managed on behalf of Deutsche Pfandbriefbank.
Aareal Bank also this morning outlined what it calls the “new normal” for CRE lending bank, which consists of an environment where Southern European economies will not be able to catch up as the rest of Europe, North America and Asia recover at differing speeds.
Continued very low interest rate levels will help to ease sovereign debt fears in in the crisis states, the bank said.
“Even though a sustainable solution to the crisis has not yet been found and a renewed escalation cannot be ruled out, latest developments on the capital markets suggests that market participants believe the worst is overcome,” said Aareal in a statement.
Despite the challenges that still exist – especially the recessionary trend in some European countries and prevailing uncertainty surrounding future regulatory measures – the management board forecasts a slight improvement in Aareal Bank’s business environment.
There remains, however, a fundamental lack of technical details around the new regulatory framework, with the uncertain cumulative effects of the different reform proposals for banks and the real economy left to be fully understood.
Against this background, Aareal Bank – which celebrates its 90th anniversary this year – believes it will at least match last year’s €6m consolidated operating profit in 2013 with the “potential to reach the very good level achieved in 2011” which was €20m.
Allowances for credit losses for this year are forecast at between to € 110m to €150m, in view of the recessionary trends in Italy, Spain and the Netherlands, compared to €106m last year. Net commission income last year of €169m is expected to be broadly repeated again this year, with guidance between €165m and € 175m.
Dr Schumacher, chairman of Aareal Bank’s management board, said: “Our strategy also works in what is being referred to as the ‘new normal’.
“On the basis of our pronounced strengths and with our strict management of costs, risks and capital, we will be in a position to achieve a solid performance, and to increase the bank’s sustainable enterprise value in the future.”