Nathan Pegel (JLL): It’s time to get creative with debt structures

Robert McLean

#cee, #proptech, #development a #architecture

Your position “Corporate Finance Director” for CEE is a new one at JLL. I assume it’s connected with these disruptively high interest rates?

JLL created position this position for CEE because rising yields are going to make things harder for capital markets. Clients are not ready to accept the change in market prices. Sellers still want the good old prices, while buyers want the new price. Until they come to an agreement, we’re sort of on pause there.

More developers and real estate investors are going to struggle to find proper financing. They’re going to need to find creative ways to structure their financial debt maturity. I think this position is really interesting because it’s about offering different products for different types of real estate developers and investors. Even the larger groups may need to be more creative.

Why’s that?

Banks will only lend out a certain amount of money to individual sponsors. That could make the bigger players more open to the idea of moving into debt funds or insurance funds. If they’re unable to refinance their bonds at a good rate, they could shift to doing it on a project level.

The mid-sized companies usually don’t have someone like me who covers the whole CEE region and has an Austrian and German banking background. I think I can bring them new ideas, new banks, or creative products they might not know about. There’s also an opportunity with smaller players who may have always worked with just one or two banks. Until now, they got standard loan products and might believe there’s nothing else out there. I think those clients could really take advantage of our knowledge.

The bond market has dried up as banks became more selective and the rates shot up. Finance isn’t just an afterthought anymore.

Exactly. It’s not so much about pricing any more as about the finance. Right now, you have a buyer and seller who are about to exchange the asset. Before, if the loan was expiring, you could just sell it. Now you might be forced to refinance it first. Either because you want to see how the markets plays out. Or perhaps the buyer wants to acquire it with financing in place (because he’s scared about the interest rate climate). It’s a different environment now, then when cheap money was available.

Assuming banks have a finite amount to put into real estate, isn’t a squeeze on smaller players likely?

I think the banks will be cherry picking a lot, just taking the good deals. We could be useful for more speculative situations like developments opportunities or assets that aren’t as easily financed (like hotels or shopping centers).

Who’s going to make up the difference?
Little banks will probably get more involved. They weren’t even approached much in the past, but I’ve seen smaller banks becoming a little more willing to lend out for real estate financing. I think they’re opening up to the idea, but that has a lot to do with the fact that there’s demand for it.

What other sources are there?

Debt funds. The alternative lending meaning private equity investors. You’ve got funds that focused on mezzanine investing, meaning higher risk investing. Your B credit can also be looked at. You could also see larger funds and banks from abroad that could be willing to step into a market that’s going to give opportunity. But I think the big thing for us will be alt funds, debt funds, insurance funds, pension funds that perhaps are willing to do direct lending. There are quite a few out there. It’s just that in the past the main focus was for them to buy the product afterwards, not be the direct investor or lender. They’d buy the product from the bank and invest in real estate and mortgages through a different instrument. Now, I think things are turning towards direct lending from these funds and that could make a nice difference in the future.

How does this compare to standard vanilla bank financing?

If you’re regular banks are going to do Euribor +2% with a strong-covenant company. Euribor is at 2.698% or maybe on a five-year euribor swap we’re already at 3.136%. So you’re at an all-in of well over 5%. Debt funds don’t lend in the same way. They’ll treat it like a bond and look for a coupon of 6% – 7%. So it’s usually a bit higher than the bank’s. But I think it’s a decent return for the developer and for the investor. It’s not too bad if they need the money. These options are also much quicker. There are fewer regulations. Usually in these funds you don’t have to go through the approval process you would have to normally at banks which is highly regulated.

How about ESG requirements?

They’re less strict on ESG. Everyone is focusing on ESG right now but with banks, they’re almost saying we won’t invest in anything that doesn’t match up with ESG requirements. I think that’s the direction they’re headed. I think with the debt funds they’re more opportunistic. They’re not going to get those easy deals, and if they do they’ll feel lucky about it.


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