Lenders Survey in Commercial Real Estate 2014 - Spain

Lenders Survey in Commercial Real Estate 2014 - Spain Content

1

Executive Summary

Introduction and Conclusions

4

2

Lending Appetite

Huge level of liquidity - Appetite for Commercial Real Estate is back - Battle for high quality assets

6

3

Loan Amounts

The bigger the better

7

4

Asset & Debt types 8

5

Main variables

LTVs – Spreads – Loan Terms – Deal Size – Club Deals / Syndication – Covenants (DSCR) – Guarantees – Lending Burocracy

10

6

7

8

Importance of borrower vs. transaction

General Topics

11 NPLs & Lessons learnt - Recent deals - Underwriting (U/W) – Refurbishment / Development - New financing trends - Coexistence with Debt Funds - Expectations

12

Our Understanding 13

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Lenders Survey in Commercial Real Estate 2014 1.- Executive summary Introduction • JLL believes that there is no better way to get a clear understanding of the Commercial Real Estate Debt markets´ current situation than asking to some of the main players of the sector, not only Banks, but also the Real Estate Debt Funds and Insurance Debt Platforms • The Lenders Survey in Commercial Real Estate 2014 – Spain, on a highly confidential basis, encompasses each Lender´s direct testimonial which reflect market sentiment and provide clearness and transparency to the Spanish Property Finance market • We are delighted with the positive feedback and commitment of the respondents:  12 Financial Entities participating:  5 of them National and 7 International  5 Spanish Banks, 3 International Banks, 3 Debt Funds and 1 Insurance Debt Platform • As result, we have valuable information that we are presenting in this Report, including some of the most reliable Lenders´ comments • Some of the participants who authorized JLL to mention their names include Bankinter, Credit Agricole, HIG Capital, Allianz Real Estate, Blackstone, ING Real Estate Finance, Caixa Bank and Starwood Capital • As a general comment, Spanish economy is still facing a tough deleveraging process, but a slow economic recovery has begun. Real Estate Investors and Lenders are discounting this recovery, taking advantage of the opportunities

Survey Participants

Debt Funds 25% National 42%

International 58%

Financial Institutions 75%

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Lenders Survey in Commercial Real Estate 2014 1.- Executive summary Main conclusions • The finance situation started to evolve on Q4´13, since then there have been key changes: 1 Spanish Real Estate market has reached the bottom and liquidity problems have been partially solved, at least for a period of time

5 There is increased competition between lenders seeking to provide large tickets loans on prime assets

2

Clear positive change of investors´ perception of the sector

3 Most financial institutions again consider income producing assets an accepted asset class amongst the lending community

4 Numerous new entrants in the market, especially Debt Funds

• As a result of all these changes, key financial variables have changed very rapidly since Q4´13:

1. Margins have begun to tighten to between 225-350bps for Senior Debt 2. A reduction on the 400-600 bps seen for 2012-2013

3. LTV / LTC ratio has increased to between 50-70%

• •

Notable liquidity pressure, for both investment and lending in Commercial Real Estate Demand creates market Competition creates value With high demand for property finance, Lenders may need to look further up the curve risk

The Spanish Commercial Real Estate market will register a record transaction volume this year. Mainly driven by international investors and, since June 2014, by Socimis, the Spanish REITS With rd. €192 billion in gross non-core real estate exposure, Spain will remain a key market for opportunistic investors. The majority of this figure corresponds to REOs (real estate owned) and residential non performing loans (NPLs)

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Lenders Survey in Commercial Real Estate 2014 2.- Lending Appetite What is the current lending appetite of your financial institution in the Spanish Market?

• 92% of the surveyed institutions have a high or very high appetite in the Spanish Commercial Real Estate Sector • Availability of debt has increased substantially since Q2´ 14 • Recovery of the interest of International Lenders; more than 10 are active in the Spanish market • For both Senior Loans and Mezzanine Loans, with strong competition for the best Real Estate assets

The Hunger Games… scarce product for so many Lenders

National Institutions

Debt Funds Very High 20%

Very High 33% High 60% Low 20%

International Institutions

High 67%

Financial Institutions Very High 33%

High 57%

Very High 43%

High 56% Low 11%

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Lenders Survey in Commercial Real Estate 2014 3.- Loan amounts Lending appetite in Spain in terms of annual loan amounts / objectives?

• International Lenders focused on large tickets • Figures related to new money transactions (ie. Refinancing not included) • Figures also related to properties purchased during the last two years with full Equity

Sizes matter: The bigger the better

Debt Funds

National Institutions 0 - 20€M 25%

>100€M 25%

International Institutions 20 - 50€M 25%

20 - 50€M 25%

20 - 50€M 33%

>100€M 67%

50 - 100€M 25%

50 - 100€M 12%

>100€M 63%

Financial Institutions 0 - 20€M 15%

>100€M 39%

20 - 50€M 23%

50 - 100€M 23%

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Lenders Survey in Commercial Real Estate 2014 4.- Asset classes Which asset classes are the preferred to be financed by your company?

• Retail, Logistics and Hotels are the preferred assets • Location has a higher weight for Logistics than other asset types • Spanish Banks have recovered the appetite for prime Residential • Financial Institutions are willing to assume more risks in value added Hotel deals “It would seem more Lenders chasing assets than assets available in the market”

Level of Interest

Location Relevancy*

Non interested 33%

Offices Interested 67%

Non interested 25%

15

2 Prime

Prime Value Added

6

5

15

2 Prime

Prime Value Added

Interested 75%

5

10

Interested 50%

Non interested 50%

Non interested 67%

Interested 33%

2 Prime

Prime Value Added

9

9

5 0

Decentralized

2 Prime

Prime Value Added

Decentralized

7 4

5 0

Decentralized

11

10

10

Decentralized

10

10

0

Non interested 25%

Hotels

Residential for sale

6

5

5

Interested 75%

Leased residential

10

10

0

Interested 75%

Logistics

15

0

Non interested 25%

Retail

3G Market:  Good Assets  Good Locations  Good Sponsors

2 Prime

Prime Value Added

Decentralized

10

5 5 0

4

2 Prime

Prime Value Added

Decentralized

*Lenders can choose one or more locations

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Lenders Survey in Commercial Real Estate 2014 4.- Debt types Which debt types is your Company considering?

• Some Lenders are willing to take more risks, looking not only at plain vanilla deals • National Financial Institutions only willing to finance Senior Debt • Some International Institutions are willing to finance mezzanine up to 80% LTV • Fall in capital values is analyzed, however Lenders focus mainly in Cash Flow, not value driven

“Risk comes from not knowing what you're doing” ― Warren Buffett

National Institutions

Debt Funds Senior 25%

Mezzanine 37%

Senior 100%

Others 25%

International Institutions Mezzanine 25%

Financial Institutions Corporate RE 19%

Mezzanine 8%

Senior 69%

Senior 37%

Corporate RE 13%

Others 19%

Corporate RE 15%

Others 8%

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Lenders Survey in Commercial Real Estate 2014 5.- Main variables Where are the following variables today versus 12 months ago?

• Sharp increase in LTVs and decrease in spreads, during last 12 months • All in all, with interest rates close to zero, cost of funding is improving • Difficult to find Lenders willing to underwrite above €200m.

• Improved timing to get loan approvals

Spreads

LTVs Up to 80%

From 200 to 350 bps for Senior Loans

8

7

8

6 4 2

0

2

1

2

<50%

<60%

<70%

<80%

6

4

0

>200 pbs

>300 pbs

>400 pbs

2

4 2

< 7 years

< 10 years

6

6

2

< 5 years

>100 pbs

8

4

< 15 years

0

1 0 - 10M

2

10 - 20M

3

20 - 50M

>50M

Covenants (DSCR)

Club Deals / Syndication Few deals, most Banks not willing to take U/W risks 8

1,20x continues being the reference 8

6

6

6

6 3

4

3

2

4

3

2

1

2 0 - 10M

20 - 50M

50 - 100M

>100M

<1,15X

<1,20X

<1,25X

<1,30X

With an improving trend

Securities registered and full hedging 8

6

6

0

Lending burocracy / time for approvals

Guarantees

4

2

Max. €200m of Underwriting (U/W)

2

0

4

Deal Size

Up to 12 years

0

4

2

Loan Terms

4

6

6

10

4

5

2

8 4

2 0

Standard

Standard + Full Hedging

Standard + Full Hedging + soft and hard cov. Default

0

< 2 weeks

< 1 month

< 2 month

< 3 month

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Lenders Survey in Commercial Real Estate 2014 6.- Importance of borrower versus transaction Importance of the borrower • “Trustworthy partners are key in the relationships” • According to a Spanish Bank, “borrower quality has an impact in LTV and conditions” • One International Lender believes that the project is more important than the borrower. “When things go wrong the more sophistication implies more problems”

Track record of Sponsors are key to get loan approvals

Debt Funds

National Institutions Very High 38%

Very low 12%

Very High 25%

High 50% High 38%

Low 12%

International Institutions

High 67%

Low 25%

Financial Institutions

Very High 40%

Very High 33% High 50%

Very low 10%

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Lenders Survey in Commercial Real Estate 2014 7.- General Topics Some Lenders´ comments on current market status • Real Estate lending is based in Cash Flows, not in valuations • Spain continues being a distressed market, according to some International Lenders • Many structured solutions to restructure / work out NPLs portfolios

#

Topic

Main conclusions

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What has been your experience in workout with NPL's. foreclosed properties, Real Estate Companies under bankruptcy…?

 “A lot of bad experiences”  Some international investors investing massively in NPLs, REOs, distressed portfolios, etc

2

In your opinion what have we learnt from the Real Estate crisis?

 “Not much, we will forget it soon and repeat the same mistakes”  “No es café para todos”

3

What has your firm done recently in terms of Property financing in Spain?

 All Lenders finance Commercial Real Estate; and some Spanish Lenders finance Residential developments  Some International Lenders finance REOs and NPL´s

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Are you considering to underwrite Refurbishment / Development / Repositioning Finance in good locations?

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In your opinion when will Development loans return to a reasonable level?

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What is your opinion on new financing trends, eg, to include in the Term Sheets soft and hard covenant defaults?

 Longer Term Sheets, to avoid confusion later  Not too much confidence in covenants effectiveness

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What are your expectations? How do you see the market going forward?

 Slow economic and real estate market recovery  Expected higher LTVs and lower spreads  Socimis to continue being protagonists (8 of 10 recent investment deals)

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How do you expect it will work the coexistence of traditional financial institutions with the new Debt Fund players (shadow banking)?

 New Lenders speak about cooperation with traditional Lenders  Most Banks think new Lenders are marginal and will increase their market share with distressed investors  Some Banks believe that, when conditions change, Debt Funds will leave the market, as per their higher RoE requirements

 Only some Lenders in good locations  Developments still not in the pipeline, except some concrete cases  Spanish Banks willing to finance Prime residential developments  Most Lenders consider that it will return in one year  Small number of Properties for sale will push Refurbishment / Development Loans  A healthy market (approx. 10% of GDP) will take at least 5 years

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Lenders Survey in Commercial Real Estate 2014 8.- Our understanding Range of conditions offered by the Lending community

Senior Debt Spread (bps)

Term

Amor.

Re-Financing / Acquisition Stable Asset

225 350

5 – 12 years

Re-Financing / Acquisition Repositioning

300 600

Renovation Financing

Mezzanine Debt

LTV / LTC

Ticket (€ M)

Spread (bps)

Term

Amor.

2% - 3%

50%70%

5M – 200M

400 – 1,000

3–7 years

3–5 years

0% - 3%

40%50%

5M – 60M

400 – 1,000

300 700

6 – 24 months

---

40%50%

3M – 30M

Conversion Financing

400 700

6 – 24 months

---

40%50%

Development Financing

400 800

12 – 36 months

---

30%50%

Special Situation

LTV / LTC

Ticket (€ M)

0% - 2%

70% / 80%

5M – 200M

3–5 years

---

50% / 80%

3M – 50M

500 – 1,500

6 – 24 months

---

50% / 70%

3M – 50M

3M – 30M

500 – 1,500

6 – 24 months

---

50% / 70%%

1M – 50M

3M – 200M

500 – 1,500

6 – 36 months

----

50% / 70%

3M – 200M

1,000 – 2,500

1–5 years

0% 10%

30% / 50%

10M – 1,000M

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Tangible benefits • Manage the debt arrangement and due diligence processes – this streamlines the timeline.

• Create competitive tension between potential lenders, ensuring best possible lending terms.

• Lawyers and advisors are provided with the correct information in a timely manner and remain focused and efficient.

• Our experienced team can identify the relevant issues from the outset, resulting in fewer problems later in the process.

• Secure the best terms for the client´s facility, whereas you remain focused on developing a strong working relationship with the lender.

• We are able to use our market knowledge to deliver lower margins and better terms than borrowers are able to without our involvement.

• More than 270 professionals at JLL Capital Markets, Corporate and Real Estate Finance, in 17 European countries.

• Extensive track record of real estate financing: € 2,8 billions in 96 deals in Spain.

A 20 basis points saving on the margin and arrangement fee on €100m of debt represents a saving of €1.2m in bank fees and interest over 5 years.

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Contacts Jorge Valenzuela National Director Capital Markets - Spain Director Debt Advisory Tel: +34 91 789 11 00

Mobile: +34 672 785 906

Email: jorge.valenzuela@eu.jll.com

Jorge Valenzuela is head of Debt Advisory Services in Spain. He has over 20 years in European lenders. Jorge is experienced in property and development finance, Real Estate advisory and financial director, with top tier brands such as Rheinhyp (currently HypothekenBank Frankfurt), Westdeutsche ImmobilienBank, Bank of Scotland (Lloyds Group) and Hill International.

Jorge has participated in the origination, structuring and closing for the financing on transactions in excess of € 2,8 billion, in Spain and Europe.

Chris Holmes Director Head of Debt EMEA Corporate Finance Tel: +44 (0)207 399 5728

Mobile: +44 (0)7887 656084

Email: chris.holmes@eu.jll.com

Chris Holmes is head of the UK Debt Advisory team responsible for over £1.0bn of current financing mandates. He has 21 years of UK and European property investment and banking for bilateral lending and capital markets solutions, and has worked on lending transactions in excess of over £5 billion.

Major transactions include providing £700m of financing for the Henderson UK Retail Warehouse fund, providing £280m of senior debt finance for Intu’s Bromley and Uxbridge Shopping Centres and arranging Canary Wharf’s £975m bond issue secured against 5 & 33 Canada Square and 15 Westferry Circus.

Irene Verdes-Montenegro Analyst Capital Markets - Spain Debt Advisory Tel: +34 91 789 11 00

Mobile: +34 670 300 915

Email: irene.verdes-montenegro@eu.jll.com

Joined JLL (Madrid) in 2013, having worked in the Valuation and Advisory department as a Junior Consultant. In 2014 joined the Capital Markets Department as Analyst, where she focused in the areas such as Institutional Investments, Private Investors and all types of Lenders. She has provided a wide range of consultancy and valuation services for investors, owner-occupiers and developers, related with all type of properties in Spain. Currently she is working in Debt Advisory in Capital Markets department advising on financing for Lenders and Borrowers in acquisitions, refinancing and restructurings.

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Lenders Survey in Commercial Real Estate 2014 The Report

JLL Real Estate practice of JLL helps real estate investment advisors, real estate investment funds, public and private investors in the sector, large corporations and REITs to define and implement strategies estate, evaluate acquisitions or sales, and perform valuations of real estate assets. Thanks to its global network, comprised of skilled professionals in the sector, JLL real estate practice offers its clients the most qualified specialist teams in areas such as capital markets, analysis and implementation of systems, research, accounting aspects and taxation.

Editorial Leadership Team Lenders Survey JLL Chairs Beno卯t du Passage, JLL Authors Jorge Valenzuela, JLL Francisco Torr贸, JLL ULI Editorial and Production Staff Ignacio Herrero, JLL Nina Priakhina, JLL Patricia Harriero, JLL

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Property Finance is Back!!!

And Development??

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Reproduction of any part of this document is authorized only to the extent necessary for its evaluation. It is not to be shown to any third party without the prior written authorization of Jones Lang LaSalle. All information contained herein is from sources deemed reliable; however, no representation or warranty is made as to the accuracy thereof.

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