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39 Offices in 19 Countries
Investment Opportunities -Where the Clever Moneyis Going
Thursday 2 May 2013
39 Offices in 19 Countries
Welcome
Nick GreenPartner, Real Estate
3
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 practicebased 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 onevoice
4
Commercial Property Investment – IsFunding Growth Back?
David Smith BA (Hons) FCIB, Director, Strata RealEstate
David will review recent trends in property lending, theimpact of regulatory changes such as Basel III and slotting,and consider whether a combination of traditional andemerging sources of finance will lead to any short termgrowth in the availability of debt.
Investment Opportunities – The Returnof Confidence to the Market
Allan Wilson, Director of Capital Markets, Jones LangLaSalle
Allan will explore the mood of the investment market andwhether the foundations for recovery are in place, and hasthis led to a more positive outlook both from London and theregions. Allan will also consider the specific sectors ofactivity.
39 Offices in 19 Countries
Commercial Property Investment – IsFunding Growth Back?David Smith
DAVID [email protected]
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 UKProperty Companies 1970 to 2011
0
2
4
6
8
10
12
14
16
18
20
0
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 CommercialProperty Debt 1999 to H1 2012
49.8
65.378.5
87.8
117.4
138.1
159.1
176.2
207.7
225.5 228.3 228.1212.3
204.1
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
0
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 LoanOriginations 1999 to H1 2012
15.019.5
22.625.2
34.1
44.9
67.9
81.383.7
22.615.1
19.927.5
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 Covenants2005 to H1 2012
Year end No of loans inbreach
Value of loans inbreach £m
Value of loans as %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 Breach2010 to H1 2012 - Split of Lenders (%)
19
4
1716
9
12
44
40
34.5
21
45
34.5
0
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 Debtby Loan-to-Value 2011 to H1 2012
Source: De Montfort University
1319
3735
1616
1413
99
11 8
0
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 ValueRatios (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 H12012
Prime office
Prime retail
Prime ind
Sec office
Sec retail
Sec ind
Resi inv
LTV%
Source: De Montfort University
Average Interest Rate Margins for InvestmentLending (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 H12012
Prime office
Prime retail
Prime ind
Sec office
Sec retail
Sec ind
Resi inv
Ma
rgin
%
Source: De Montfort University
Average Arrangement Fees forInvestment Lending 1999 to H1 2012
30
50
70
90
110
130
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H12012
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 H12012
Prime office
Prime retail
Prime ind
Sec office
Sec retail
Sec ind
Resi inv
Tim
es
Co
ver
Source: De Montfort University
IPD UK Property Total Returns Index1981 to 2012
-25
-15
-5
5
15
25
35
19
80
81
82
83
84
85
86
87
88
89
19
90
91
92
93
94
95
96
97
98
99
20
00
01
02
03
04
05
06
07
08
09
20
10
11
12
All Property
Retail
Office
Industrial
Other
IPD UK Property Total Returns Index1981 to 2012 (align to security value pattern)
Bankers reactions to theIPD 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 tobe dismantled in April 2013.
Regulatory roles to be split between two new Bank of Englandentities – 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 aresult 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 IRegulatory framework for capital adequacy of banks - introduced in 1988.
Risk weighting of assets classified: i.e. 0% (Govt bonds), 50% (residentialmortgages, lending to RSLs) and 100% (standard corporate lending).
Banks set aside capital equivalent to 8% of the Risk Weighted Asset.
Basel Accord IIEffective 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 G20Summit in Nov 2010.
Phased implementation between 2013 and2019.
Main changes:
The quality, consistency, and transparency ofthe capital base will be raised.
Introduce a leverage ratio.
Strengthen the risk management ofcounterparty credit exposures.
A global minimum liquidity standard for internationally active banks that isunderpinned 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 goodtimes that can be drawn upon in periods of stress (“reducing procyclicality andpromoting countercyclical buffers").
Slotting
Source: FSA
Remaining time to maturity Category 1Strong
Category 2Good
Category 3Satisfactory
Category 4Weak
Category 5Default
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 andother 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 banksare active. Some have increased capital allocation to property this year and giventheir front line lenders higher targets.
With competition from other categories of lenders, and a shortage of prime dealsto go around, certain banks are now considering secondary property morefavourably for their best clients. Expect banks to be picky. Borrowers need tohave a solid covenant. Deals need an adequate portfolio hedge or long reliableincome profile.
Some of the high profile overseas banks have packed up and gone home inrecent years (i.e. Eurohypo) but others stayed and continue to lend.
There are some new entrants and ‘returners’ mainly from North America andEurope.
Mezzanine
In 2005/06: 30+ banks provided mezzanine against prime and secondaryproperty. 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 CreditCrunch started. Pramerica continues to raise funds from the institutions.
Duet Private Equity was the first listed real estate mezz fund in 2011, raisingabout £100m.
Mezzanine Funds are generally increasing in scale and activity.
Govt of Singapore Investment Corporation (GIC) announced Jan 2013 that it is tounderwrite £1 billion in senior and junior debt. Target deals will include Britishshops, offices and warehouses. Laxfield Capital will front the venture. Loan sizesto range £40-185m over 5-7 years with max LTV at 75%. Senior will besyndicated with GIC retaining the mezz.
Others include ICG-Longbow, LaSalle, M&G, Henderson, BlackRock
Typical Investment Funding Structures2006 v 2013
100
77.570
42
15
10.5
7.5
17.5
0
10
20
30
40
50
60
70
80
90
100
Property Value2006
Funding LTV2006
Property Value2013
Funding LTV2013
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 scaleup. ‘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 haveless complex tranches / pricing, be more transparent, and simpler asset mix.
Emerged in the UK in the late 90s. Advantagefor lenders – recycle use of capital – achievegrowth with balance sheet efficiency.
By 2006 Barclays, Soc Gen, Credit Suisse,Deutsche Bank, Lehman Bros and RBScollectively had 78% of the total Euroland CMBSmarket. Image: Financial World
Securitisation (CMBS) – Annual Issuances2000 – 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 wereinvolved in syndicated loansin 2006 – this fell to 13 in2011 and 8 in 2012.
•Currently difficult to findsyndication partners.
•Lenders are having to agreekey terms prior to originating.
•Syndicated debt availabilitylimited in the short-mediumterm.
•In H1 2012 club deals had avalue of £1.990 bn (£4.289bn 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 stretcheddebt, 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 yearterm, 70% LTV max, margin range currently 300-450 bps.
Starwood Capital raised £229m Dec 2012 for its London listed Starwood CapitalEuropean Real Estate Finance Fund. Mixed debt strategy.
ICG Longbow raised £105m Feb 2013 for its Senior Secured UK Property DebtInvestments 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 mixedassets 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 £150mrange.
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 wantinvestments in Prop Co’s.
Equity Funds tend to co-invest in the 80/20 to 70/30 range via a combination ofcore 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 gearwhen 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 LendingOrganisations 2000 to H1 2012
8579
76
88
9589
80
63
24
4946
3842
89 89
55
23
56 57
44 42
0
10
20
30
40
50
60
70
80
90
100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H12012
Intention toincrease loanbook size
Intention toincrease loanoriginations
Source: De Montfort University
%
Short to Medium Term Outlook
42% of banks want to increase lending to the propertysector. Some will not hit their targets. Not enough dealsto go around that fit with lending criteria.
Ongoing issues to sort out with legacy loan books, butprogress is being made.
Focus remains on prime and good secondary.
Ongoing introduction of regulation will impact on capitalavailable 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 insurancecompanies, but they will not plug the gap.
More debt will be available – its a case of working out who wants tolend, where, and against what.
39 Offices in 19 Countries
Investment Opportunities – TheReturn of Confidence to the MarketAllan Wilson
Property InvestmentReasons to be cheerful
Allan WilsonDirector - Capital Markets2nd May 2013
cheerful
45
Industrial Sector
• In 2012 the West Midlands experienced higher take up than any other single UKregion 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.
46
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
47
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 returnsincreased to 1.1% for Q1
49
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 PricingGood value in the regions
Source: Jones Lang LaSalle, 2013
LondonWest End Paris CBD Moscow Frankfurt UK Regional
Average
£1,900
£1,289
£730 £621
£427
£ per sq ft
53
Confidence
54
Opportunities
• Speculative Development and Land.
• Core Plus Assets.
• Secondary and Tertiary Property.
• Increased liquidity
55
Final Thought
56
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 ofJones 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 theaccuracy 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 damagesuffered by any party resulting from reliance on this publication.
Contacts
Allan WilsonDirector - Capital MarketsJones Lang LaSalle45 Church Street | Birmingham B3 2RT+44 (0)121 214 [email protected]
39 Offices in 19 Countries
Questions?
59
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