We have joined a number of national and international CRE industry bodies in agreeing a statement on Brexit with a view to informing the negotiating approach of European policymakers.
A new edition of Commercial Mortgage Loans and CMBS was launched at CREFC Europe’s Autumn Conference. The book, titled ‘Developments in the European market’ is an essential guide to those in the CRE and CMBS industry.
It gives detailed coverage of existing CRE lending and CMBS markets post-financial crisis and Brexit, the legal and regulatory environment and the restructuring of existing deals and transactions.
We have a limited number of copies available to purchase at a discounted price of £75 (RRP £195). Please contact Rachel here if you would like to purchase a copy.
The largest CRE debt Conference in Europe attracted over 400+ delegates over two days and provided a platform for commercial real estate (CRE) finance market participants to come together to learn about and discuss the latest trends and challenges facing the industry.
You can view the highlights from our Autumn Conference here
Since the global financial crisis, there has been an understandable focus in Europe and beyond on the risks that CRE debt can present for financial stability. Indeed, CREFC Europe has supported initiatives such as A Vision for Real Estate Finance in the UK that seeks to help policymakers approach our sector in a more strategic, holistic and informed way.
What has been missing is a broader recognition that debt has a vitally important role to play in supporting investment in the real economy and the built environment. Without a sensible supply of reasonably priced credit for the CRE industry, Europe’s towns and cities would be unrecognisable, and the availability and cost of premises would be much higher for ordinary businesses. In recent years, we have also seen an explosion of interest in CRE debt as an investable asset class in its own right, albeit one with low levels of transparency outside the traditional, but much diminished, CMBS space.
Alongside three other industry organisations, the APL, INREV and ZIA, we have commissioned a major research report that seeks, for the first time, to describe the role that debt plays in the European CRE economy and for investors. We aim to use it to educate European policymakers and others about our sector, and encourage our members to make use of it too.
Collaborating with our colleagues across the pond, CREFC Europe members and staff provided the content for an impromptu CRE Finance Council conference call on the political, economic, legal and commercial landscape following the outcome of the UK’s EU referendum. Andrew Petersen of K&L Gates, Mark Battistoni of Chatham Financial and Peter Cosmetatos discussed the issues and responded to questions from more than 200 participants on the call. The audio recording is available here.
Negative interest rates have real-estate investors facing a counterintuitive quirk: their borrowing costs can actually rise as interest rates fall.
This is a mounting concern for many property investors given the potential for rates to decline further as central bankers try to spur economic growth, according to lobby group CREFC Europe.
View article here.
Sustainable and responsible securitisation markets have an important role to play in the commercial real estate (CRE) debt market, as they do in other parts of the financial system. Unfortunately, the criteria that international regulatory bodies have been developing to encourage simple and transparent securitisation ignore key aspects of the CRE debt market. As a result, an important opportunity to improve the resilience and diversity of CRE debt markets is likely to be missed. Click here to view the key points.
Thursday 14 April 2016
Negative rates causing headaches and increased costs for property investors says CREFC Europe
- CREFC Europe warns negative rates can cause potential mismatches between loans and associated interest rate hedging
- For new deals, an interest rate floor in the loan should be matched by an interest rate floor in any associated swap – which will cost extra in the current environment
- For old deals, borrowers should audit loan agreements and associated swaps to identify cases where an interest rate floor in the loan is not matched by an interest rate floor in the swap
Negative interest rates are driving up the costs of real estate lending, property chiefs have warned.
There has been widespread criticism of the European Central Bank (ECB) reducing interest rates. Moody’s warned last month of “potentially adverse effects on final stability” in Sweden. Similar reports around a housing bubble in Denmark have been echoed by Larry Fink, chief executive of BlackRock.
At a Commercial Real Estate Finance Council (CREFC) Europe seminar in London last night, experts warned that commercial property investors face new considerations and costs on new deals, and potential problems in historic deals. This is because specific provision needs to be made, and the associated cost paid, to include an interest rate floor in an interest rate swap. While that has become a sensible precaution in the current interest environment, it certainly wasn’t routine a few years ago.
With the potential for rates to decline further (see note 2 below), this will be a concern to many.
The problem of hedging interest rates
In effect, and at a cost, interest rate swaps allow a borrower to convert a flexible floating-rate loan into a fixed-rate liability that its rental income is expected to cover.
While loan agreements can include a safety net so that floating interest rates stop at zero (to prevent lenders having to pay borrowers), many older interest rate hedging derivatives don’t do that; a typical interest rate swap would not cater for this unless an interest floor is explicitly included in the contract.
“Derivatives play a crucial role in financing by allowing borrowers and lenders to hedge risk, for instance related to interest rates. The problem is that derivatives may not be set up to deal properly with negative rates,” said Adam Dann, partner at Berwin Leighton Paisner, a law firm.
Rules set down by the International Swaps and Derivatives Association (ISDA), which is responsible for standardised derivatives agreements, govern how swaps are structured. A “plain vanilla” interest rate swap would not (and should not) include an interest rate floor, but the position is different when a swap is used to hedge interest rate risk in a loan that does include such a floor. See the example in note 1 below for an illustration of the problem that can arise.
“A mismatch occurs when borrowers wish to hedge the loan with an embedded floor using a conventional interest rate swap,” said Nadim Mezher, a director in global banking and markets at HSBC.
“This is because the floating leg of an interest rate swap does not include a zero percent LIBOR floor, thus exposing the borrower to an increase in the combined financing cost should LIBOR turn negative, in the absence of a zero percent floor in the hedge,” he added.
While including an interest rate floor in an interest rate swap is straightforward, pricing it can be challenging. Mark Battistoni, managing director at Chatham Financial, the world’s largest independent interest rate and foreign exchange risk management advisor, believes parts of the derivatives markets have had a very hard time adapting to negative rates.
“Models need to be revised or scrapped in favour of new ones – in particular for interest rate options such as caps and floors,” he said. “The pace of change varies by banks, so even now, the product capabilities and price differential between mainstream banks for some hedging products is shockingly wide.”
The problem for loan agreements
In the lending context, the problem posed by negative rates is clear: if the reference rate in a floating rate loan falls below zero, the lender won’t receive the full margin for which it bargained. And if the reference rate moves far enough into negative territory, the lender could, in theory, end up having to pay the borrower interest.
The obvious solution is for the loan agreement to include a zero floor for the interest rate payable, so that the lender never has to pay interest to the borrower. The Loan Markets Association (LMA), which maintains standard form documentation for the loan syndication market, is understood to have recommended the inclusion of such a provision. But not all transactions are documented using LMA documentation, and older deals may not include a zero floor.
“In some sectors – like the leveraged corporate space which is dominated by institutional debt providers – LIBOR floors have been prevalent at levels above zero for a number of years,” said HSBC’s Nadim Mezher.
“Now that negative interest rates have become a reality in some currencies and a possibility in others, many lenders are requiring zero percent LIBOR floors on loans. This is required to protect lenders’ loan margins as some central banks have begun charging banks for excess reserves in markets where policy rates are negative, while banks in general have yet to pass on this cost to their retail and corporate clients,” added Mezher.
Peter Cosmetatos, chief executive of CREFC Europe, said: “There are numerous unintended consequences arising from negative rates. One issue, historically as well as for new deals, is ensuring that both loan agreements and related hedging arrangements all work and fit together as they should. Addressing risks in that area is likely to carry a cost.
“More broadly, our sense is that, while most lenders remain disciplined and responsible, the monetary policy environment is creating perverse drivers and unintended risks in cyclical real estate markets. Crucially, real estate investment has a key role to play in economic recovery across the world. And while only five central banks currently have negative rates, their jurisdictions account for almost a quarter of global GDP, and the international nature of real estate capital flows means that knock-on effects will impact in many markets.”
For media enquiries contact Blackstock:
We are grateful for the opportunity to comment on this consultative document (the CD). This is a submission agreed between, and made jointly by, three organisations: the Association of Property Lenders, the CRE Finance Council and CREFC Europe. A brief description of each organisation appears at the end of this letter.
Click here to see the submission.
· Highest volumes for nearly a decade underpin strength of sector
· Year-on year volumes up nearly 60%
· UK is the largest national market, followed by Germany and France
The volume of EMEA syndicated real estate finance loans for full-year 2015 (EUR74.7bn) is the highest full year volume since 2007 (EUR76.7bn) before the Global Financial Crisis, according to league tables released by Dealogic.
The full-year 2015 figures also boast 58% year-on-year increase compared to full-year 2014 when only EUR32.9bn of volume was reported.
Excluding loans to REITs, 2016’s volume stands at EUR32.9bn, a near 50% increase from 2014’s figure of EUR22.5bn, the league tables show. The number of non-REIT deals also picked up considerably, with 147 deals reported this time around compared to 86 in 2014.
The UK led the charge in contributing towards the volume, with EUR20.9bn of volume via 59 deals. Germany and France posted volumes of EUR19.9bn and EUR12.9bn respectively.
Last year’s largest deal excluding REIT activity was a EUR1.4bn loan to French borrower, Carmila SAS.
HSBC and ING are the banks placed in the top three for most of the categories for 2015, which have been collated by Dealogic based on submissions from more than 25 lenders.
The EMEA syndicated real estate finance league tables were launched in 2014 by Dealogic, and were supported by trade body Commercial Real Estate Finance Council (CREFC) Europe.
CREFC Europe is backing the league tables as a way to improve transparency across the CRE lending market giving market participants and observers an insight in to activity levels and key players.
Loan syndications – where a group of banks pool balance sheet capacity to participate jointly in a large loan – long a dominant feature of the corporate debt market, have become an increasingly important part of the CRE landscape since the crisis. Syndication is a valuable tool for originators, allowing them to manage balance sheet capacity and capital constraints efficiently. In turn, it allows a wide range of lenders to participate in loans they didn’t originate themselves. Overall syndication facilitates the effective flow of credit to the real economy, supporting urban regeneration schemes and transactional activity in the real estate market.
Steve Willingham, managing director and head of EMEA real estate finance at HSBC, said:
“These league tables are an indicator of the property sector’s commitment to transparency and collaborative working; and underline how much progress has been made since the GFC in realigning our sector to minimize risk and maximize the sharing of data.
“Clearly, the greater liquidity there is in a loan, the tighter pricing that can be achieved; and
the more market standard that terms develop, the more liquid it becomes. The transparency we are trying to promote here is crucial if we are to achieve the kind of sensible regulation we need to support the sector’s growth. Attracting a rich diversity of investors into real estate is positive not just for banks but for funds, developers and borrowers across the board”
Frank Jeschke, head of portfolio management at Landesbank Baden-Württemberg, said:
“LBBW’s league table position once more shows the meaningful role it plays in European Commercial Real Estate Finance and is a prove of the reliable underwriting capacity it has. “For us, it is a great confirmation of the strong relationships we have with institutional CRE investors as well as (of) our ability to access liquidity in the secondary markets through our platform due to the quality of our loans and the reputation we have with our syndicate partners.”
Jean-Maurice Elkouby, Head of REF Syndications at ING, said:
“We are delighted to feature so well for the second year running in those league tables. This is a valuable tool for all stakeholders: arrangers, participants and regulators alike. We think 2016 may generate the same levels of activity as more assets change hands. Refinancings will also trigger some more volumes.”
Peter Cosmetatos, chief executive of CREFC Europe, said:
“The importance of the syndication market for commercial real estate finance can be seen clearly form Dealogic’s tables. Regulatory pressure on some banks to distribute broad appetite for commercial real estate risk and a returns, and the absence of an effective securitisation market are all contributing to these healthy figures.”