Financing development is an inherently risky business and only select real estate lenders are prepared to write debt against un-built property projects.
During 2016, a slew of major development financing deals across the European and US markets have demonstrated that banks and alternative lenders are prepared to back the most prime build projects in the best locations.
London and New York have seen significant deals. In the UK capital, schemes which have attracted development loans include a major build-to-rent housing project surrounding Wembley Stadium, a 37-storey office tower in the heart of the financial district and a new shopping scheme at one of the city’s most prominent entertainment venues.
In New York, new loans have funded the latest element of the gargantuan Hudson Yards development on Manhattan’s far west side, as well as Midtown Manhattan’s to-be tallest tower and various high-end residential schemes across the city.
Large-scale regional development financing has been patchier, although the UK’s first major regional build-to-rent apartment scheme received funding, while banks backed several projects in ‘gateway’ US cities.
However, development financing remains a niche part of the real estate debt industry. De Montfort University’s latest bi-annual report showed that only 11 organisations were prepared to provide the authors with information on financing terms for fully pre-let UK development. At the end of 2015, 21 had done so.
German banks are more open to providing construction finance, with new business of €32.2 billion recorded in 2015 by the University of Regensburg’s German Debt Project, up 22.6 percent year-on-year.
Marble Arch Place, London
The UK debt community buzzed with speculation earlier this year about the identity of a mysterious lender which had agreed a £400 million, five-year secured loan for Almacantar’s entirely speculative redevelopment of Marble Arch Tower in the capital.
In May, Real Estate Capital revealed that the lender on what will become Marble Arch Place was The Children’s Investment Fund Management (TCI), the alternative asset investor which had financed prominent Manhattan condo towers, but had never lent on real estate before in the UK.
Almacantar’s team, led by CEO Mike Hussey and finance director Jonathan Paul, had bought the 1960s tower in 2011 for £80 million and began working on a scheme to replace it with 54 apartments overlooking Hyde Park and 100,000 square feet of offices in a seven-floor building next door, plus street level retail, a cinema and off-site housing. They first spoke to TCI’s chief investment officer Martin Frass-Ehrfeld two years before the loan was secured.
“He made it very clear this was the scheme he’d like to fund in London. He said, come back when you’re ready,” Paul recalls.
With development finance in short supply, TCI was one of the very few able to underwrite £400 million at all, let alone an entirely speculative, mixed-use project which will take four years. Almacantar also negotiated with two other parties: another alternative lender, believed to be Starwood, and a bank, thought to be Lloyds. CBRE Capital Advisors advised Almacantar on the financing.
Paul says TCI was chosen because “of their incredible flexibility and responsiveness as lenders, which is quite unusual. We took advice from other borrowers who they’d worked with in the US and they made the same point. They only have to deal with one individual, (Frass-Ehrfeld) so you don’t have a credit committee structure to go through as you would with a traditional lender.”
Changes are often needed along the way in development, and as Almacantar is the leaseholder and the freeholder is the Portman Estate, there was additional complexity. TCI’s flexibility trumped cost – the all-in coupon on the 60 percent loan-to-cost facility is believed to be in the high single digits – although Paul says that with none of the commitment fees a bank might charge, “it becomes apparent how alternative lenders can compete quite effectively.”