Starwood Capital has crystallised concerns that market optimism in some Western European real estate markets is now “slightly ahead of actual fundamentals”, which is captured by some lending transactions that are “questionable on either price or structure or both”.
The global private equity manager, which acts as investment advisor to the Starwood European Real Estate Finance (SWEF), the UK main market-listed real estate debt fund, said market optimism has led investors to complete their refinancing requirements while reinvigorating appetite for new equity investments.
The picture painted by Starwood, in SWEF’s interim management statement published this morning, is one of a market continuing to fragment with both attractive opportunities and isolated signs of over-heating, as well as a return of some unwise equity and debt investments.
SWEF reported a £1bn pipeline of whole loans investment opportunities which are likely to be focused in the UK regions, notably Manchester, Leeds, Birmingham, Glasgow and Edinburgh.
In addition, SWEF will seek to exploit the “bottom” of the cycle in a number of Continental European markets, including Ireland, the Netherlands and in Scandinavian markets were domestic banks remain reluctant to lend on “transitional”, or unstabalised, commercial property.
“Some of these opportunities immediately meet the company’s target return requirements, and some will require subsequent syndication to achieve these levels.”
SWEF also confirmed that fully investing the initial £233.8m raised last December could spill into the first months of next year, thereby missing its promise of full investment within 12-months by one or two months.
While the reasons for the delays are varied, SWEF explained in its IMS: “The key frustration has clearly been the time taken to consummate transactions and invest the capital.
“The IPO occurred at a pivotal moment in time when the European markets started to change fundamentally from that of a defensive and negative position to that of more cautious optimism which has fed through into both the equity and debt capital markets.”
SWEF also confirmed it has reduced its maiden dividend per share forecast for the full year from 3.5 pence per ordinary share to 1.9 pence ordinary share, although this could still rise slightly.
At the turn of the month, Starwood finally announced its refinancing of Almacanter’s Centre Point Tower with £220m, of which Starwood Property Trust took £180m and SWEF provided £40m.
Starwood’s development loan refinances and extended the legacy £50m Eurohypo development loan, which was inherited by Wells Fargo, and is thought to be priced at between 5% and 6% on an IRR basis.
At the end of September, Almacanter extended its ownership of Centre Point from 75% to full ownership after agreeing to buy out Frogmore’s 25% stake for an undisclosed sum.
Almacantar and Frogmore’s revised plans for a £350m regeneration of Centre Point, which secured consent in July, comprise a comprehensive refurbishment to transform the 34-story Grade II Listed Property at 103 New Oxford Street into a high-value mixed-use scheme including 82 residential flats.
At the time of the refinancing, Mike Hussey, chief executive of Almacantar, said in a statement: “Almacantar’s strategy is to reposition large-scale, complex commercial and residential assets in Central London. We are delighted to have secured the support of a single, sophisticated lender that can align a flexible loan facility with our asset plan.”
CoStar News understands the underbidder lending ticket to Starwood’s one-stop solution was a consortium of UK clearing banks including Lloyds and RBS.
SWEF has now made or committed to seven investments, for a total value of approximately £156.4m, representing 66.3% of net assets.
On 1 October, Starwood refinanced Heron Tower – again from a legacy Eurohypo development loan which was subsequently inherited by Wells Fargo – with a £288m five-year senior loan. JPMorgan provided £210m of the total.