Capital markets facing struggle to close transactions

‘It would be bullshit to say the real estate market hasn’t slowed down: it has significantly slowed down,’ says one agent bluntly when asked for his (unattributable) views on the effect of coronavirus lockdown on European capital markets.

Another who is at the sharp end advising crossborder capital says: ‘We’ve been focused on closing those deals that were either exchanged prior or were about to exchange.

‘And I can tell you the results have been mixed: there’s some good news and some bad’.

There are deals that had been in place for weeks or months that have stumbled right at the finish line. Hammerson announced on 21 February that it had exchanged contracts to sell seven UK retail parks for £400 mln (€452 mln) to Orion, but Orion is now believed to be trying to renegotiate.

Manchester Airport Group’s £510 mln sale of 69 UK properties and sites to Columbia Threadneedle - agreed last year and also exchanged - was said yesterday by React News to be in jeopardy, although negotiations continue. The news website says the buyer invoked a material adverse conditions clause, a term that is popping up around Europe.

A listed company due to acquire a very large Italian hotel portfolio from a private equity firm, for example, is said to be considering using a MAC clause to back out.

At the same time, other transactions that were in exclusivity around the start of the pandemic are getting over the line and at good prices. In the last few days, PropertyEU reported that Aberdeen Standard Investments sold the King Square portfolio, Danske Bank’s HQ in Copenhagen, to German fund KanAm after taking bids in February. The price was said to be DK2 bn (€268 mln) which is more than the DK1.6 bn that ASI paid four years ago.

Amundi closed a prime German logistics acquisition at a sub 4% yield and is proceeding with a deal to buy a Paris office building. Heimstaden closed a residential acquisition in the Netherlands, telling PropertyEU that talks started before the crisis and closed after it took hold.

Savills Investment Management, Invesco and CBRE GI have made new logistics investments in the last month while Blackstone has swallowed two more industrial portfolios, from Cromwell European Real Estate Trust and Clearbell Capital on the continent and in the UK respectively, with the US giant getting a modest reduction on the original price agreed for the UK assets.

Last week Brookfield exchanged contracts on a 50% stake in Harwell research campus and its £870 mln acquisition of Plantation Place is on track as is Canadian investor Cadillac Fairview’s of the BBC headquarters in White City, both in London. Ghelamco has entered exclusivity with a German fund believed to be Deka to sell 40,000 m2 Silver Tower in Brussels. KGAL is under offer to buy two office buildings formerly owned by Green REIT in Dublin. The vendors will be crossing their fingers that these go through.

To market, or not to market?
In most cases, deals still completing are core investments, in prime locations. ‘Even after the lockdown, we have seen buyers who did not negotiate on the price because they want to perform’, says another broker. ‘These are core investors who have a lot of money to deploy in the sector. The right properties are still in huge demand.’

‘This is not a real estate crisis‘, explains another agent. ‘One thing I know is momentum remains with equity-rich, core investors, because they have collected the money and they need to invest.

‘However, although there is activity, there is less momentum than before. Investors are active but they are working from home. They are studying new projects, but everything is delayed because obviously you can’t do a technical audit, you can’t get into buildings.’

Whether to keep marketing at all now is therefore the dilemma. A few, very core investments were launched last month, like the Coop distribution hub in Oslo, Norway’s largest-ever logistics sale.

However, recently-launched more complex or value-add sales are being pulled - PropertyEU is tracking some of these in our weekly data round-up. One of the latest is operational asset specialist M3's, advised by CBRE. They withdrew a £500 mln portfolio of UK motorway service stations.

Brokers believe future sales processes will be taken all the way to exclusivity, at which point completion will be paused until the situation is clearer and due dilligence can be completed.

The other new normal is that it will only be possible to market assets equity-rich buyers want. Availability of debt has shrunk dramatically as lenders try to re-price risk.

‘The real issue is the ability to secure financing’ one of the brokers concludes. ‘It is not possible unless you are a blue-chip sponsor, particularly if that financing requires someone to securitise or syndicate a piece of it. That is not going to happen.

‘The syndication market is totally frozen. Lots of banks can write €150 mln loans and hold them on their books and so for very good sponsors, terms are still available. But not for the general market, so that is going to have an impact on deal volume going forward.’