Europe’s real estate markets are in the midst of a dichotomy between pockets of the UK “showing very early signs of overheating” and Spain displaying “patches of optimistic exuberance”, while the European Central Bank’s (ECB) asset quality review is unlocking options for capital deployment elsewhere, reported Starwood Capital.
Starwood Capital, investment manager to listed debt fund Starwood European Real Estate Finance (SWEF) which reported its half year results this morning, wrote that certain markets, such as central London offices and residential, have “arguably fully recovered”.
Starwood added that it is not that the fund would no longer invest further in such markets but rather that it is now applying a higher degree of caution.
“Other markets such as Spain seem to see patches of perhaps optimistic exuberance,” continued the statement, “hand in hand lenders, notably US investment banks, have re-found an interest in the provision of loan capital.
“Any investment deal of low-to-reasonable leverage in core sectors and with good sponsors now attracts excess liquidity which has resulted in substantial pricing decline.”
Starwood said at the same time there remains an ever-greater volume of structured finance investment opportunities elsewhere within European real estate capital markets, particularly within Central Europe.
This, Starwood suggests, is the continued dichotomy of European capital markets.
“On one side macroeconomic policy, including the European Central Bank’s announcements, continue to ensure the market has strong liquidity and a penchant for hunting yield.
“On the other side the on-going need for deleveraging as well as addressing problem situations by banks has been turbo charged by the asset quality review. Events in Portugal are perhaps an example of other situations likely to occur over the coming months which encourage macro risk whilst also creating deal level opportunities.”
For SWEF, the broader opportunities across the UK, particularly within the regions, continue to support a medium-term view that the fund’s geographical weighting would continue to be above 50%.
In addition, Holland remains a key focus for new business, following two deals in the last two months: a €25m participation in a €99m, 50:50 investment loan and capex facility, extended to hotel owner Liran Wizman’s W branded hotel in Amsterdam; and €55.9m of an enlarged €71.4m whole loan to MBay, the joint venture between M7 Real Estate and Bayside Capital focusing on light-industrial Dutch assets.
A full report of SWEF’s most recent quartet of deal closures can be viewed here.
In its half-year results, SWEF commented further on future jurisdictions on the debt fund’s radar: “Whilst an Irish investment has not yet been effected the group remains positive on this market for deployment of capital.
“Central Europe has become more interesting as the asset quality review appears to be unlocking a number of potential situations. Following approval to adjust the investment policy guidelines, Italy and Spain are being considered on a cautious risk-adjusted basis.”
SWEF wrote to shareholders back on 2 April to seek approval to extend the parameters of its investment universe to Spain and Italy on a cautious risk-adjusted basis, which was subsequently approved.
SWEF reported a 94% net capital deployment after amortisation and prepayments as at 26 August but remains principally focused on the recycling of returned capital, through periodic loan amortisation and prepayments, to mitigate cash drag and maintain current returns.
Annualised total return for the six months to 30 June of SWEF’s invested loan portfolio – comprised of £120.2m in six UK loans and €112.3m in three European loans – was 8.6%.
Of the nine loans originated to date, SWEF expects to syndicate approximately £42m, releasing this for reinvestment in order to increase the net portfolio yield up from 6.9% to in excess of 7%.
SWEF reported to be “in advanced discussions with credit approved acquirers” in respect of these loans and expects to complete syndications during the second half of the year.
In addition, SWEF will continue to access deal flow through the provision of whole loans with a more active focus on the subsequent syndication of senior positions to enhance returns while retaining the mezzanine strip, especially in the UK.