SPONSORED ARTICLE
New players swell the pack
hunting out debt solutions
A growing range of intermediaries is both brokering debt for borrowers and acting as
outsourced origination platforms for lenders. James Wright, head of real estate finance at
new market entrant Capita Real Estate Finance, surveys the market’s changing landscape
T
he role of an intermediary or
broker, which has primarily
been to source and obtain
secured real estate debt on a
client’s behalf, has expanded in recent years.
It can now include, on the clients’ side,
additional advice on the entire life of a debt
transaction from structuring (including
consideration of a client’s wider debt
profile) through to negotiation of documentation alongside lawyers, as well as
much in between.
The variety of intermediaries has also
expanded to include parties who act
exclusively for lenders, effectively providing
an outsourced origination platform. So
today we must consider two distinct sets
of intermediaries in the European market:
client-side intermediaries and those who
act on the lender side.
The basic process for a client-side
intermediary would start with the initial
underwriting and evaluation of the funding
requirement. The transaction would then
be structured and funding proposals and
cash flows would be constructed prior to
marketing the transaction to lenders.
The marketing of the transaction is
either conducted on a far-and-wide basis or
via targeted approaches. The intermediary
would then provide assistance on negotiating commercial aspects of the heads of
terms, secure a suitable binding offer and
manage the closing process.
This dedicated resource enables the client
to concentrate on the day job, with the
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REAL ESTATE CAPITAL
“A GOOD CLIENT-SIDE
INTERMEDIARY DOES NOT
JUST PLACE DEBT, BUT
OFFERS A CRADLE-TOGRAVE SERVICE, SOURCING
THE BEST TERMS FROM A
LENDER THAT WILL DELIVER
IN A TIMELY MANNER”
James Wright, Capita REF
comfort that their appointed intermediary
is well versed with the financing market
and can meet the funding requirements
with the most competitive terms.
A good client-side intermediary does not
just place debt, but offers a cradle-to-grave
service, sourcing the best terms from a
lender that will deliver in a timely manner
both in terms of credit approval and funds
drawdown.
Using an intermediary is a way to
outsource debt placement not just for a
single deal, but also to help investors
manage and grow their real estate
portfolios most efficiently.
Lender-side intermediaries, on the other
hand, will either be exclusive with a single
capital source, or non-exclusive, sourcing
debt opportunities to place with one of
their stable of lenders, who will remunerate
them for the introduction of new business.
In recent years the profile of Europe’s
intermediary market has changed significantly in a number of ways. First, the number
of intermediaries has increased enormously,
at the smaller and the larger ends of the
market. The type of intermediaries and
brokers has also changed in terms of the
firms active in the space, the size of their
teams and the personnel leading the charge.
A few large international property services
firms have had a European debt intermediary capability for a number of years. But
recently, smaller firms have stepped into the
space, hiring external banking/brokerage
experience to do so. A property services
offering gives an intermediary immediate
access to deal flow on the client side.
Loan servicers have also begun to establish
teams in the past two years. Servicers
benefit from established relationships with
a variety of lending institutions, many of
which are retained clients, coupled with a
reputation for reliability, integrity and a
process-driven service.
Capita Real Estate Finance, which
SEPTEMBER 2015
SPONSORED ARTICLE
straddles both camps by having an end-toend property-level services platform, as well
as being Europe’s largest independent loan
servicer, also joined the market this year.
Other notable market entrants have
been North American investment banking
platforms, while consultancies, accountancy
practices and law firms have also expanded
their presence in the space and a large
number of boutiques have been formed.
The other prominent change is the type
of borrowers using intermediaries. As well
as the family offices, asset managers, mid-tier
developers and high-net-worth individuals
who traditionally formed the basis of
intermediary clients, today, some REITs,
listed property companies and large private
equity fund managers have recognised the
value of using intermediaries in terms of
both market intelligence and resource.
This is in addition to highly sophisticated
foreign capital of all kinds coming into the
European market for the first time.
A DIVERSE LENDING LANDSCAPE
So, why has the market expanded and
changed in these ways? Diversification of
the lending landscape and the increasing
specialisation of specific participants’
appetites is a contributing factor. There are
a plethora of lenders active in the market
today: Capita Real Estate Finance is
tracking over 160 within the UK alone.
After the financial crisis, traditional
lenders reduced their exposure to commercial real estate both at the smaller end
of the market, where challenger banks,
debt funds, peer-to-peer networks, family
offices, alternatives and bridge lending
specialists have now stepped in; and at the
larger end, where foreign banks, insurers,
pension funds, debt funds and hedge funds
have joined the returning investment banks.
The new market entrants are doing significantly more business across the market
year-on-year as they have expanded their
market share in a growing pool of capital.
Alternative lenders, i.e. not banks, building
societies or insurers, are forecast to grow to
nearly a third of the lending market in the
SEPTEMBER 2015
next five years, according to the Commercial Real Estate Finance Council.
Traditional lenders’ treatment of
defaulted and non-core loans since the
financial crisis has led to a reduction in
some of the borrowing community’s focus
on personal lender relationships. Cheap
sources of funding in the equity and bond
markets have also reduced large borrowers’
reliance on secured real estate debt as a
primary funding source.
Borrowers who have taken advantage of
some of the newer sources of debt in the
market have been partly drawn to such
sources by the flexibility these lenders offer,
often benefitting their overall funding profile.
One group of new market entrants
seeking to capitalise on borrowers’ shifting
priorities are the challenger banks, which
tend to operate on a broker-only model,
solely originating through intermediaries.
Another reason for the changes is the
increased prevalence of mezzanine debt
and structured finance. Bi-lateral loans
exceeding 70% of asset value generally
require multiple counterparties or whole
loan/stretched senior providers who are
likely to syndicate part of the loan, adding
another layer of complexity for borrowers.
The increase in the number of intermediaries has also coincided with a large
increase in US private equity investment in
Europe, which is generally led by small
teams controlling vast allocations of capital
in few funds. Outsourcing of debt raising
activity is commonplace in the US market.
The fact that new equity sources are
consistently coming into the market from
the US as well as Asia and the Middle East
“BROKERS AND
INTERMEDIARIES AT THE
SMALLER END OF THE
MARKET MAY FIND IT
INCREASINGLY DIFFICULT
TO COMPETE WITH PEERTO-PEER PLATFORMS”
James Wright, Capita REF
also provides a source of investors without
knowledge of local debt markets or existing
local banking relationships.
MORE INTERMEDIARIES COMING?
The diversity across debt and equity markets
in Europe has created a fertile ground for
intermediaries. Most commentators assert
that diversity will continue to increase, so
there is a compelling case for demand-led
expansion in the intermediary space.
Successful platforms can be expected to
expand, become more sophisticated and do
more business in the short term.
However, brokers and intermediaries at
the smaller end of the market may find it
increasingly difficult to compete with peerto-peer platforms as they become more
sophisticated, reduce costs of funds, improve
software and attract clients directly.
At the larger end of the market,
intermediaries lacking strong unique selling
points could find that deal flow becomes an
issue.Those without strong and broad lender
relationships to call on, lacking clear valueadding expertise to draw on or without a
borrower client base to provide deal flow
may find that others serve the market better.
We certainly expect to see specialisation
of intermediaries’ processes increase. For
example, as senior lending institutions raise
loan-to-value thresholds and mezzanine
debt providers increasingly step into whole
loan positions to gain transaction access,
supported by the strong syndication markets,
we may see some of the structuring work
regularly undertaken by intermediaries
becoming less important to borrowers.
Conversely, lenders may see this as an
increasingly core component of advice
provided by lender-side intermediaries, as
they will seek to access secondary markets
for subsequent sell down. The focus of and
skill sets within intermediary groups will
begin to look more diverse as a result.
So while we may not see the same
numbers of new intermediaries being
established as we have in the past few years,
we do expect the current contributors to
be bigger and more sophisticated. ■
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