Starwood European Real Estate Finance (SWEF), the UK main market-listed real estate debt fund, has attributed a slower than expected deployment of its £233.8m due to its protracted participation in the bidding process for Eurohypo’s UK commercial property loan book during the second quarter.
While the commercial property loan portfolio was not named directly, SWEF wrote in its interim financial report that Starwood Capital, SWEF’s investment adviser, had “devoted a reasonable degree of resources in the second quarter of 2013 to bidding for a large loan book”.
SWEF added that the deal which would have been transformational for the company, allowing it to deploy much of its cash in a single transaction underpinned by strong property and loans”.
“In the end our bid, whilst competitive, was insufficient,” continued the statement. “However, we believe that the company remains well place to participate in this type of transaction.”
As a result, deployment by SWEF – which aims to originate, execute and acquire real estate debt investments in the UK and Continental European markets – has been slower than anticipated, with just 8.1% of proceeds from last December’s IPO invested as at 30 June 2013.
SWEF’s maiden loan came just two weeks after raising its IPO on 12 December – at which £223.93m, followed by three tap issues over March and April amounting to £9.9m.
It was a £19.1m mezzanine participation in a wider £147m mezzanine facility, which formed part of a £547m five-year refinancing secured by three five-star London hotels owned by the Maybourne Hotel Group, which is 64%-controlled by the billionaire Barclay brothers, Sir Frederick and Sir David Barclay.
SWEF’s mezzanine participation was at low 50% LTV, and will earn a double-digit yield.
Subsequent to the reporting period, to 30 June, SWEF has committed an additional £22.8m of capital in two new investments:
- a £10m participation in a £55.75m three-year term loan to Brockton Capital secured by the former Royal Mail depot on New Oxford Street. The initial LTV is 50% and the loan is expected to generate approximately a 7% gross IRR.
- a £8.5m participation in a £16.75m mezzanine loan and £4.3m participation of a £40m senior loan, secured by Lifecare Residences group, the developer and operator of retirement care villages in both the UK and New Zealand. This investment has been undertaken on a mid-60% loan to gross development value and the SWEF will earn a blended double-digit yield.
In addition, SWEF reported that terms have been agreed for five loans with investment potential of £117m, which are all expected to all to close by the end of September.
If all five deals close, taking SWEF’s tally to eight in total since last December’s IPO, 68% of its £233.8m capital would be invested, reflecting £158.9m of capital, leaving £74.8m left to deploy before the end of the year, in line with is stated objective of full capital deployment inside 12 months.
SWEF reported that during the second quarter Starwood focused on direct client origination and reviewed “a significant number of potential investment opportunities” but “the implied mezzanine became too slim and where tenant fundamentals were weak”.
“Delay or failure to consummate transactions is also being caused by the excessive amount of time involved in moving refinancings forward which leads to many deals becoming derailed by borrowers believing they are able to refinance higher levered deals which fall down in the due diligence stage,” continued SWEF in last week’s published interim financial report to 30 June.
SWEF downgraded its dividend target from 3.5 pence per ordinary share, to 1.2 pence based on the three deals that have closed, but up to 2.4 pence if all five pipeline close.
SWEF’s largest shareholders include BlackRock Investment Management, Cheviot Asset Management and the Starwood Property Trust.
Increased activity and more active players
In its market commentary, SWEF reported: “Market optimism has also engendered a resurgent desire for investors to act upon their refinancing requirements or reinvigorated interest in new investment. This typically creates a greater need for creative property lending.
“On the supply side, many European banks continue to focus on their withdrawal or reduction of exposure to the sector not least to meet Basel III as well as real estate finance being a non-core activity.
“We do, however, see that global monetary easing has created a generic ‘hunt for yield’ and political pressure to lend is also present, not least in the UK through the ‘Funding for Lending’ scheme. The UK clearing banks have greater lending capacity but do remain, for the most part, cautious on business possibilities.
“An increasing US and European insurance presence means there is excess finance capacity for the prime London office market for strong sponsors and low leverage.
“Similarly mainstream German lending has become more competitive especially with the appetite and resultant pricing for Pfandbrief, the key covered bond issuance program for domestic German real estate lending banks.
“Meanwhile the mezzanine lending space continues to develop and is summarily defined by investment funds raising substantial third party capital for higher return lending strategies – we expect to observe at least £2bn of fund style investor commitments to the specialist fund managers in this field by the end of 2013.
“Put together the picture is fundamentally one of increased activity and active players.”