Investment Opportunities - Where the Clever Money is Going - - PowerPoint PPT Presentation

39 Offices in 19 Countries

Investment Opportunities - Where the Clever Money is Going

Thursday 2 May 2013

39 Offices in 19 Countries

Welcome

Nick Green

Partner, Real Estate

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5 key things you may not know about us

Supporting clients in the region and beyond,

for over 140 years

One of the most global legal practices,

with lawyers in 39 offices and 19 countries worldwide

Top-20 global legal practice

based on number of lawyers

In 19 countries, 9th broadest global footprint

Practicing law in more than 140 jurisdictions, in more than 40 languages, but speaking with one

voice

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Commercial Property Investment – Is Funding Growth Back?

David Smith BA (Hons) FCIB, Director, Strata Real Estate David will review recent trends in property lending, the impact of regulatory changes such as Basel III and slotting, and consider whether a combination of traditional and emerging sources of finance will lead to any short term growth in the availability of debt.

Investment Opportunities – The Return

• f Confidence to the Market

Allan Wilson, Director of Capital Markets, Jones Lang LaSalle Allan will explore the mood of the investment market and whether the foundations for recovery are in place, and has this led to a more positive outlook both from London and the

• regions. Allan will also consider the specific sectors of

activity.

39 Offices in 19 Countries

Commercial Property Investment – Is Funding Growth Back?

David Smith

DAVID SMITH

david.smith@stratarealestate.co.uk 07545 082825

COMMERCIAL PROPERTY INVESTMENT: IS FUNDING GROWTH BACK?

Rutland House, 148 Edmund Street, Birmingham Thursday 2 May 2013

Les Miserables!

Source: Estates Gazette 22 September 2012

LENDING VOLUMES, RATIOS AND PRICING

Total Debt Outstanding to UK Property Companies 1970 to 2011

2 4 6 8 10 12 14 16 18 20 50 100 150 200 250 300

1970 71 72 73 74 75 76 77 78 79 1980 81 82 83 84 85 86 87 88 89 1990 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 2010 2011

Source: DTZ Research and Bank of England

Total Debt £ bn Av Base Rate %

Aggregate Value of UK Commercial Property Debt 1999 to H1 2012

49.8 65.3 78.5 87.8 117.4 138.1 159.1 176.2 207.7 225.5 228.3 228.1 212.3 204.1 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 50 100 150 200 250 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H1 2012

Source: De Montfort University / Bank of England

Av Base Rate % £ bn

Annual Value of Loan Originations 1999 to H1 2012

15.0 19.5 22.6 25.2 34.1 44.9 67.9 81.3 83.7

22.6 15.1 19.9 27.5 11.3 26.6 29.2 10.9 6.8 1.9

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H1 2012

Extended loans New deal originations Originations (total)

Source: De Montfort University

£ bn 49.2 44.3 30.8 34.3 13.2

Average

Loans in Breach of Financial Covenants 2005 to H1 2012

Year end No of loans in breach Value of loans in breach £m Value of loans as %

• f agg loan books

2005 689 1,225 < 1.0% 2006 1,928 4,234 2.5% 2007 1,051 1,597 <1.0% 2008 3,770 10,695 6.5% 2009 3,665 28,305 15.5% 2010 7,733 21,975 12.0% 2011 8,366 22,821 12.0% 2012 mid-year 7,719 22,043 12.3%

Source: De Montfort University

Primary Reason for Cause of Breach 2010 to H1 2012 - Split of Lenders (%)

19 4 17 16 9 12 44 40 34.5 21 45 34.5 5 10 15 20 25 30 35 40 45 50 2010 2011 H1 2012 Interest wholly/partly unpaid Principal wholly/partly unpaid LTV covenant breached Combination Other

Source: De Montfort University

%

Allocation of Outstanding Debt by Loan-to-Value 2011 to H1 2012

Source: De Montfort University

13 19 37 35 16 16 14 13 9 9 11 8 10 20 30 40 50 60 70 80 90 100

2011 H1 2012 121% + 101-120% 86-100% 71-85% 51-70% Less than 50%

%

Average Maximum Loan to Value Ratios (Senior Debt) 1999 to H1 2012

55 60 65 70 75 80 85

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H1 2012

Prime office Prime retail Prime ind Sec office Sec retail Sec ind Resi inv

LTV%

Source: De Montfort University

Average Interest Rate Margins for Investment Lending (Senior Debt) 1999 to H1 2012

0.75 1.25 1.75 2.25 2.75 3.25 3.75 4.25

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H1 2012

Prime office Prime retail Prime ind Sec office Sec retail Sec ind Resi inv

Margin %

Source: De Montfort University

Average Arrangement Fees for Investment Lending 1999 to H1 2012

30 50 70 90 110 130

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H1 2012

Prime office Prime retail Prime ind Sec office Sec retail Sec ind Resi inv

bp

Source: De Montfort University

Average Income to Interest Cover (Senior Debt) 1999 to H1 2012

1.00 1.20 1.40 1.60 1.80 2.00 2.20

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H1 2012

Prime office Prime retail Prime ind Sec office Sec retail Sec ind Resi inv

Times Cover

Source: De Montfort University

IPD UK Property Total Returns Index 1981 to 2012

• 25
• 15
• 5

5 15 25 35

1980 81 82 83 84 85 86 87 88 89 1990 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 2010 11 12

All Property Retail Office Industrial Other

IPD UK Property Total Returns Index 1981 to 2012 (align to security value pattern)

Bankers reactions to the IPD capital value trends

REGULATION

• FSA abolition and new BoE entities
• Basel I, II and III
• Slotting

FSA Out – FPC & PRA In

Financial Services Authority (FSA)

• Financial Services Bill 2012 – announcement that the FSA is to

be dismantled in April 2013.

• Regulatory roles to be split between two new Bank of England

entities – FPC and PRA.

Financial Policy Committee (FPC)

• FPC will have a macro prudential role established to identify

and address potential risks to stability in the financial system.

• FPC will have the power to set the ‘counter cyclical capital

buffer’ requiring banks to hold more capital.

• Could impose tougher capital requirements on certain sectors,

such as property.

Image: Financial World

Prudential Regulation Authority (PRA)

• PRA will have the micro supervisory role and address issues at specific organisations.
• Has the power to regulate the day-to-day running of individual lenders.

Financial services organisations expect their regulatory costs to increase by up to 20% as a result of the FSA splitting in two (Source : Protiviti).

Financial Policy Committee

Source: Estates Gazette 30 March 2013

The FPC’s first piece of business..............

Basel I and II Accords

Basel Accord I

• Regulatory framework for capital adequacy of banks - introduced in 1988.
• Risk weighting of assets classified: i.e. 0% (Govt bonds), 50% (residential

mortgages, lending to RSLs) and 100% (standard corporate lending).

• Banks set aside capital equivalent to 8% of the Risk Weighted Asset.

Basel Accord II

• Effective from 2007. Adopted by >100 countries worldwide.
• More complex and demanding on capital than Basel I.
• Loan specific – matrix of risk issues i.e. LTV, type of loan, security

and period to maturity.

• Higher LTV / longer term = more capital. Hence LTVs lower for

senior debt and mezzanine lending reduced considerably.

• More capital required for historic lending where LTVs increased as

a function of lower property values.

• Capital for certain risks = 12% or higher.
• Aim was that banks held capital relative to risks, preserved future

solvency, and in turn economic stability.

Image: Financial World

Basel III

• Basel III Accord agreed at South Korea G20

Summit in Nov 2010.

• Phased implementation between 2013 and

2019.

• Main changes:
• The quality, consistency, and transparency of

the capital base will be raised.

• Introduce a leverage ratio.
• Strengthen the risk management of

counterparty credit exposures.

• A global minimum liquidity standard for internationally active banks that is

underpinned by a longer-term structural liquidity ratio. Rules relaxed Jan ‘13.

Image: Financial World

• Introduce a series of measures to promote the build up of capital buffers in good

times that can be drawn upon in periods of stress (“reducing procyclicality and promoting countercyclical buffers").

Slotting

Source: FSA

Remaining time to maturity

Category 1 Strong Category 2 Good Category 3 Satisfactory Category 4 Weak Category 5 Default

Less than 2.5 years

50% 70% 115% 250% 0%

Equal or more than 2.5 years

70% 90% 115% 250% 0%

• Introduced by the FSA in 2012. Only applies to UK banks, not overseas banks and
• ther lending institutions. Created an uneven playing field.
• Lenders have to allocate loans into ‘slots’ depending on risk category and maturity.
• Risk weighting determines capital allocation to loans.
• Criteria for slotting includes:
• LTV and debt service cover ratios
• Asset quality
• Cashflow predictability
• Borrower covenant
• Stress analysis

Slotting

Source: Estates Gazette 19 January 2013

FUNDING SOURCES

• UK and Overseas Banks
• Mezzanine Funds
• CMBS
• Syndications
• Debt Funds
• Insurance Companies
• Equity Funds

UK and Overseas Banks

• Availability of debt from UK banks has contracted, but most of the major banks

are active. Some have increased capital allocation to property this year and given their front line lenders higher targets.

• With competition from other categories of lenders, and a shortage of prime deals

to go around, certain banks are now considering secondary property more favourably for their best clients. Expect banks to be picky. Borrowers need to have a solid covenant. Deals need an adequate portfolio hedge or long reliable income profile.

• Some of the high profile overseas banks have packed up and gone home in

recent years (i.e. Eurohypo) but others stayed and continue to lend.

• There are some new entrants and ‘returners’ mainly from North America and

Europe.

Mezzanine

• In 2005/06: 30+ banks provided mezzanine against prime and secondary
• property. Less than 10 now provide mezz, predominantly against prime assets.
• Pramerica set up a £150m Mezz Fund June 2010 for investment deals £20-100m.

They raised £492m in May 2011 - largest mezz fund established since the Credit Crunch started. Pramerica continues to raise funds from the institutions.

• Duet Private Equity was the first listed real estate mezz fund in 2011, raising

about £100m.

• Mezzanine Funds are generally increasing in scale and activity.
• Govt of Singapore Investment Corporation (GIC) announced Jan 2013 that it is to

underwrite £1 billion in senior and junior debt. Target deals will include British shops, offices and warehouses. Laxfield Capital will front the venture. Loan sizes to range £40-185m over 5-7 years with max LTV at 75%. Senior will be syndicated with GIC retaining the mezz.

• Others include ICG-Longbow, LaSalle, M&G, Henderson, BlackRock

Typical Investment Funding Structures 2006 v 2013

100 77.5 70 42 15 10.5 7.5 17.5

10 20 30 40 50 60 70 80 90 100

Property Value 2006 Funding LTV 2006 Property Value 2013 Funding LTV 2013

Equity Mezz Debt

£

Source: Strata Real Estate Consulting / IPD / DMU

• ---------2006----------
• ---------2013----------

25.0% 15.0% 75.0% 60.0%

Mezzanine

Source: Estates Gazette 19 January 2013 Source: Estates Gazette 12 May 2012

Securitisation (CMBS)

• The largest UK single client / portfolio issue was £850m (+£105m mezz).
• LTVs reached 85-90%+, hence Prop Cos could stretch their equity and scale
• up. ‘Investment grade’ tenants (BBB or better) and long-ish leases.
• CMBS market halted in the UK mid 2007 (apart from ‘synthetic’ issuances).
• Various ongoing issues with maturities, defaults, extensions, workouts etc.
• CMBS has returned in the past 2 years at a low level. ‘CMBS 2’ will have

less complex tranches / pricing, be more transparent, and simpler asset mix.

• Emerged in the UK in the late 90s. Advantage

for lenders – recycle use of capital – achieve growth with balance sheet efficiency.

• By 2006 Barclays, Soc Gen, Credit Suisse,

Deutsche Bank, Lehman Bros and RBS collectively had 78% of the total Euroland CMBS market.

Image: Financial World

Securitisation (CMBS) – Annual Issuances 2000 – H1 2012

1.80 6.70 3.70 5.90 4.30 12.60 18.20 8.95 0.00 0.00 0.00 0.29 0.21 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00 20.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H1 2012

Source: FitchRatings / DMU

£ bn

Syndications

14.86 13.43 5.98 1.13 0.74 2.62 0.56 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 2006 2007 2008 2009 2010 2011 H1 2012

Source: De Montfort University

• About 20 lenders were

involved in syndicated loans in 2006 – this fell to 13 in 2011 and 8 in 2012.

• Currently difficult to find

syndication partners.

• Lenders are having to agree

key terms prior to originating.

• Syndicated debt availability

limited in the short-medium term.

• In H1 2012 club deals had a

value of £1.990 bn (£4.289 bn in 2011).

£ bn

Debt Funds

• Debt Funds have emerged over the past couple of years in the UK.
• Some high profile senior bankers have been recruited.
• Renshaw Bay team assembled H1 2012. Intend to provide senior and stretched

debt, and participate in club deals. May look to CMBS eventually for churn.

• Ag Fe targeting £1bn UK Real Estate Fund. Prime and good secondary, 5-7 year

term, 70% LTV max, margin range currently 300-450 bps.

• Starwood Capital raised £229m Dec 2012 for its London listed Starwood Capital

European Real Estate Finance Fund. Mixed debt strategy.

• ICG Longbow raised £105m Feb 2013 for its Senior Secured UK Property Debt

Investments debt fund (also London listed).

• Others (active and evolving) include Fortress, Cheyne Capital, Cordea Savills,

AEW Europe, CBRE Global Investors, Pricoa, Henderson and Aeriance (resi).

• Capital A Finance set up by Pears Q3 ‘12 – target £250m senior debt on mixed

assets inc secondary.

Debt Funds

Source: Estates Gazette 9 March 2013 Source: Estates Gazette 27 April 2013 Source: Estates Gazette 12 January 2013

Insurance Companies

• Insurance companies have been in the UK debt market for over 30 years, but,

new entrants more noticeable in the past few years.

• Canada Life (1980) - £5m to £50m range, all sectors.
• Aviva (1983) – generally big ticket and15-25 year terms.
• MetLife (2000) – up to £200m, one of the largest big ticket lenders in the UK,

focus on prime borrower/prime property in London/SE (apart from B8).

• Axa (2005) - £20m to £100m.
• M&G (2009) – funded by the Pru, lending at a rate of c. £1bn p.a. at present,

senior and mezz, acquisition and refinance. Lot sizes £50m to £400m.

• Allianz (2010) – expanding out of Germany into other countries. £50m to £150m

range.

• Legal & General (2012) - £20m to £100m. Initial loan to Unite £121m Q2 ’12 (60%

LTV, 10 year fixed rate 5.05%). Targeting several billion loan book.

Equity Funds

• A limited number of Equity Funds will arrange JVs / third party investments.
• Many Funds have their own in-house asset management teams and don’t want

investments in Prop Co’s.

• Equity Funds tend to co-invest in the 80/20 to 70/30 range via a combination of

core equity, B notes, mezz.

• Secondary assets often considered – better growth / returns potential.
• ‘All cash’ deals are possible where assets would struggle to obtain debt gearing.

With a portfolio accumulation strategy Funds and Prop Co’s will want to gear when assets are performing to improve IRRs and increase scalability.

• IRRs around 20%
• Performance returns possible for Prop Co’s after initial IRR hurdle achieved.

SHORT TO MEDIUM TERM OUTLOOK

Future Lending Intentions by % of Lending Organisations 2000 to H1 2012

85 79 76 88 95 89 80 63 24 49 46 38 42 89 89 55 23 56 57 44 42 10 20 30 40 50 60 70 80 90 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H1 2012

Intention to increase loan book size Intention to increase loan

• riginations

Source: De Montfort University

%

Short to Medium Term Outlook

• 42% of banks want to increase lending to the property
• sector. Some will not hit their targets. Not enough deals

to go around that fit with lending criteria.

• Ongoing issues to sort out with legacy loan books, but

progress is being made.

• Focus remains on prime and good secondary.
• Ongoing introduction of regulation will impact on capital

available for property lending i.e. Basel III and slotting.

• Unlikely to see any improvement in lending terms.

Image: Financial World

• New sources of debt are emerging i.e. debt funds and insurance

companies, but they will not plug the gap.

• More debt will be available – its a case of working out who wants to

lend, where, and against what.

39 Offices in 19 Countries

Investment Opportunities – The Return of Confidence to the Market

Allan Wilson

Property Investment

Reasons to be cheerful

Allan Wilson Director - Capital Markets 2nd May 2013

cheerful

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Industrial Sector

• In 2012 the West Midlands experienced higher take up than any other single UK

region with 19% of the UK total.

• Add the East Midlands and this increases to 33%.
• 2007 – 21 new distribution warehouses available.

Today only 3 available in the region over 100,000 sq ft.

• Shift of emphasis to design and build.
• Similar positive story in the small unit market.

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Office Sector

• 2012 take up was circa 550,000 sq ft against an average of 650,000 sq ft.
• Positive shift thus far in 2013 however.
• Light at the end of the tunnel.
• Paradise Circus
• Arena Central
• Natwest Tower

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Economic Background

• Avoided triple dip recession, Q1 growth of 0.3%.
• The service sector grew by 0.6%.
• The industrial sector grew by 0.2%.
• Construction contracted by a further 0.25%
• Retail sales down 0.2% in February – Weather effect.
• Inflation remains unchanged at 2.8%.
• Anticipated to exceed to 3% plus later this year.
• Labour market shrinking with unemployment forecast to 8.2% next year.

48

Source: Jones Lang LaSalle, 2013

IPD Returns

• Retail returned 0.8%.
• Offices returned 1.2%.
• Industrial returned 1.5%
• Overall, fragile recovery but reasons for cautious optimism.

All property returns increased to 1.1% for Q1

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So what about Birmingham?

• Second City.
• GDP of £94 million.
• Largest financial and professional services sector in the UK regions.
• Largest labour force in the UK regions.
• Think big and at European level.
• Key infrastructure projects:
• New Street Station
• Birmingham Airport extension
• HS2
• Metro extension

We need to play to our strengths

Who are the Investors?

Source: Jones Lang LaSalle, 2013

33% UK 67% Global 2012 (£m)

Overseas Equity

Relative Pricing

Good value in the regions

Source: Jones Lang LaSalle, 2013

London West End Paris CBD Moscow Frankfurt UK Regional Average £1,900 £1,289 £730 £621 £427

£ per sq ft

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Confidence

54

Opportunities

• Speculative Development and Land.
• Core Plus Assets.
• Secondary and Tertiary Property.
• Increased liquidity

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Final Thought

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Final Final Thought There is light at the end of the tunnel.

This publication is the sole property of Jones Lang LaSalle IP, Inc. and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of Jones Lang LaSalle IP, Inc. The information contained in this publication has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in respect of the accuracy of this information. We would like to be informed of any inaccuracies so that we may correct them. Jones Lang LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication.

Contacts

Allan Wilson Director - Capital Markets Jones Lang LaSalle 45 Church Street | Birmingham B3 2RT +44 (0)121 214 9941 allan.wilson@eu.jll.com

39 Offices in 19 Countries

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