Aeons Before the Big Bang - Sir Roger Penrose Christmas Lecture
Will insurance companies return as competitors to banks for big ticket commercial property deals?
Insurance companies are returning to a previous role as lenders to soothe Britain's property debt famine and turn dealmaking hopes to reality, in moves that may break the banks' stranglehold on big-ticket property deals. Banks took the market during the last property cycle by using the CMBS market to access funds at returns lower than insurance companies would accept.
Aviva Investors has thrown the issue into relief by offering debt funding to the successful bidder for a £750-800 million portfolio of 47 retail parks, offices and warehouses code-named "Project Ed".
The growing trend of vendor-arranged debt has sparked signs of life in Britain's listless real estate sector, flushing out buyers who fled when the boom turned to bust. Brokers believe the trend may in time coax typical lenders out of hibernation. "If we see more big portfolios come up, and the debt markets have not loosened, we will see more of these types of stapled finance deals," said Cushman & Wakefield partner Alastair Hilton. "This trend may even encourage them (banks) back," he said.
The competitive chase for "Ed" has surprised some experts -- especially since UK commercial property transactions plumbed their lowest depths this decade in the first quarter, with just £3.6 billion of deals, CB Richard Ellis data shows. Rumours abound that Aviva Commercial Finance has offered 75% of the required capital to buy the portfolio for a seven-year period at 275 basis points over LIBOR. A spokeswoman for the company declined to comment on the terms.
The structure echoes the deal between HSBC and Spain's Metrovacesa when the ill-fated property firm bought the bank's skyscraper offices in Canary Wharf for a record-breaking £1.1 billion in April 2007. "Project Ed" is not the first time Aviva has taken up the pseudo-banker role. In March, its Norwich Union unit provided £500-550 million of debt to F&C REIT to help it buy 211 properties previously owned by the failed Dawnay Day Group. Now, Aviva is seeking a sale to rebalance its over-exposure to UK property. The stapled finance deal will reduce its asset management responsibilities and enable it to preserve an interest in the future growth of the portfolio. The assets have an average unexpired lease term of more than nine years and are let on more than 250 tenancies.
Aviva Investors' head of Aviva Life Funds -- UK Real Estate, Joel Lindsey, said the portfolio was possibly one of the largest and most diverse collections of quality UK commercial properties to come to market this year. "There have been increasing signs of late that UK and overseas investors are looking to move back into UK commercial real estate and the opportunity to secure debt financing is likely to further support that interest," Lindsey said.
Despite the stapled finance package, some property market experts feared the deal could still fail at the final hurdle. They claim the rare opportunity to buy heavily discounted UK real estate in bulk has excited investors more than the quality of the assets and that a thirst to deploy capital was growing too intense to ignore. "It's a different kind of pressure from that felt by those who have a fund that has committed capital that can be drawn when necessary. If you're sitting on cash, it does start to impact your returns over time," said one real estate banker. What is more, the debt finance sweetener is an incentive only wealthy vendors like insurance companies and pension funds will be able to afford, meaning many firesellers could still struggle to find buyers. With a handful of investors left in the hunt for "Ed", Aviva advisor DTZ is collecting final bids imminently. Those expected to submit offers include privately owned real estate investment firm Topland, CIT in joint venture with Saudi Arabia's Jadwa Investment, and investment firm ROM Capital supported by Middle Eastern backers. The deal is due to complete before end-July and some experts hope it will break a deadlock between buyer and seller in the UK commercial property market. "The success of this deal has a big bearing on morale in the market, not simply because it is such a big chunk but also because it will reveal attitudes towards real estate outside London," said Cushman & Wakefield's Hilton.
However, the commercial property market rally is broadly seen taking longer outside London and demand from prospective buyers for provincial assets has been tentative as a result. "The foreign interest has given London a great crutch but outside the capital, the commercial property market has a very different complexion. The market will only move on this if the pricing is right and this deal could help us discover that."
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