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

Investment Opportunities - Where the Clever Money is Going Thursday 2 May 2013 39 Offices in 19 Countries

Welcome Nick Green Partner, Real Estate 39 Offices in 19 Countries

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 3

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 of 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. 4

Commercial Property Investment – Is Funding Growth Back? David Smith 39 Offices in 19 Countries

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 Total Debt £ bn Av Base Rate % 20 300 18 250 16 14 200 12 150 10 8 100 6 4 50 2 0 0 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

Aggregate Value of UK Commercial Property Debt 1999 to H1 2012 Av Base Rate % £ bn 250 7.00 228.3 228.1 225.5 212.3 207.7 6.00 204.1 200 176.2 5.00 159.1 150 138.1 4.00 117.4 3.00 87.8 100 78.5 65.3 2.00 49.8 50 1.00 0 0.00 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H1 2012 Source: De Montfort University / Bank of England

Annual Value of Loan Originations 1999 to H1 2012 £ bn 90.0 83.7 Extended loans 81.3 80.0 New deal originations 67.9 Originations (total) 70.0 60.0 49.2 50.0 44.9 44.3 Average 40.0 34.3 34.1 26.6 29.2 30.8 6.8 30.0 25.2 22.6 10.9 19.5 20.0 15.0 13.2 27.5 1.9 22.6 10.0 19.9 15.1 11.3 0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H1 2012 Source: De Montfort University

Loans in Breach of Financial Covenants 2005 to H1 2012 Year end No of loans in Value of loans in Value of loans as % breach breach £m of 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 (%) 50 45 44 45 40 40 34.5 34.5 35 30 Interest wholly/partly unpaid % Principal wholly/partly unpaid 25 21 LTV covenant breached 19 20 17 16 Combination 15 12 Other 9 10 4 5 0 2010 2011 H1 2012 Source: De Montfort University

Allocation of Outstanding Debt by Loan-to-Value 2011 to H1 2012 100 8 11 90 9 9 80 13 14 70 121% + 16 60 101-120% 16 % 86-100% 50 71-85% 40 35 51-70% 37 30 Less than 50% 20 10 19 13 0 2011 H1 2012 Source: De Montfort University

Average Maximum Loan to Value Ratios (Senior Debt) 1999 to H1 2012 85 Prime office 80 Prime retail 75 Prime ind Sec office LTV% 70 Sec retail Sec ind 65 Resi inv 60 55 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H1 2012 Source: De Montfort University

Average Interest Rate Margins for Investment Lending (Senior Debt) 1999 to H1 2012 4.25 3.75 Prime office Prime retail 3.25 Prime ind Margin % 2.75 Sec office Sec retail 2.25 Sec ind 1.75 Resi inv 1.25 0.75 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H1 2012 Source: De Montfort University

Average Arrangement Fees for Investment Lending 1999 to H1 2012 130 Prime office Prime retail 110 Prime ind Sec office bp 90 Sec retail Sec ind 70 Resi inv 50 30 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H1 2012 Source: De Montfort University

Average Income to Interest Cover (Senior Debt) 1999 to H1 2012 2.20 Prime office 2.00 Prime retail 1.80 Prime ind Times Cover Sec office 1.60 Sec retail Sec ind 1.40 Resi inv 1.20 1.00 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H1 2012 Source: De Montfort University

IPD UK Property Total Returns Index 1981 to 2012 35 25 All Property Retail 15 Office Industrial 5 Other -5 -15 -25 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

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 The FPC’s first piece of business.............. Source: Estates Gazette 30 March 2013

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 . Image: Financial World  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.  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  Introduced by the FSA in 2012. Only applies to UK banks, not overseas banks and other 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. Category 1 Category 2 Category 3 Category 4 Category 5 Remaining time to maturity Strong Good Satisfactory Weak Default Less than 2.5 years 50% 70% 115% 250% 0% 70% 90% 115% 250% 0% Equal or more than 2.5 years  Criteria for slotting includes: Source: FSA  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