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Warehouses under the hammer

If you want to buy UK commercial real estate worth £300m or more, there aren't a lot of options out there.

Single assets at this price point are mostly prestige London office blocks or superregional shopping centres, and the bid-offer between sponsors that own assets and the levels where new owners want to buy is wide. A good chunk of the UK's superprime CRE is in the hands of sovereign wealth, Korean pension funds and so on, the kind of capital provider in the business of owning for the long term, not selling.

But there's a juicy source of sizeable portfolios in the UK REIT sector, an underloved and under-owned corner of the Britain's dwindling equity market.

Many of these listed trusts have persistently traded at substantial discounts to net asset value (as with investment trusts in other asset classes).

One can interpret this as a market signal, and the signal is saying "these assets would be more valuable in someone else's hands". Questions over corporate governance, dividend policy, and fee structure have also been raised as reasons why the shares have underperformed.

These make a tempting target for private equity and hedge funds looking to invest in the sector. There's good disclosure about what these funds own, and corporate governance structures that oblige boards to take bids seriously. Shareholders who have seen prices languish might be inclined to get out while they can, rather than hang about to see if the shares ever reflect the optimistic marks from the original investment manager.

They're a tempting target for other funds as well; bigger REITs have been swallowing smaller ones lately. NewRiver REIT bought Capital & Regional in December last year, while LondonMetric bought HighCroft Investments in May.

The struggle is very live in the case of Warehouse REIT, a logistics fund that is the subject of a bidding war between Blackstone and Tritax Big Box, another REIT that has been a consolidator, purchasing UK Commerical Property REIT in May last year. Blackstone has form in this part of the market, having bought St Modwen Logistics in 2021 and Industrials REIT in 2023.

At the time of writing, Blackstone was the preferred bidder, having raised its offer last week, but who knows where this ends?

Potential purchasers can buy somewhere between undisturbed share price and net asset value. In the case of GoldenTree’s purchase of Aberdeen Property Income Trust in November, the 64p per share offer was squarely between the 51.6p share price at the end of June and the 73.3p quoted NAV, though it carved out a Cairngorms estate which didn't quite fit with the mix of light industrials and office properties in the rest of the portfolio.

Effectively, listed REIT structures force a market-based recognition of real estate value, enabling deals to be struck, while real estate private equity can extend, pretend, and keep valuations in fantasy land.

Buying these out is also an opportunity to jack up leverage. UK REITs are generally low-levered, with a little piece of bank or insurance debt up to maybe 20%-30% LTV. In commercial real estate, a leverage-hungry corner of the capital markets if ever there was one, that’s distinctly lacking in ambition, and so there’s plenty of room to improve things even with a structure that’s only levered down to double-B.

This has resulted in a nice bit of supply for the CMBS market (coming off a very low base). BofA sold a CMBS this week, Taurus 2025-4, backed by the loan funding GoldenTree’s Aberdeen buyout; just a month earlier Taurus 2025-3 funded Starwood's buyout of Columbia Threadneedle’s Balanced Commercial Property Trust.

Earlier this year, Blackstone-sponsored UK Logistics 2025-1 (a turbulent Liberation Day syndication) funded properties acquired from Industrials REIT and St Modwen.

These aren’t just single trades, as Blackstone’s activities show clearly. Having bought a portfolio, it’s possible to turn this base into a broader CRE investing platform, a particularly advantageous move where there’s a heavy slug of logistics assets. Scale matters in logistics, and being able to offer nationwide space in large size is a competitive advantage.

The GoldenTree deal and Starwood deal priced relatively close to one another: 125/160/195/300/425 for GoldenTree and 120/160/200/280/380 for Starwood, though they’re not perfect comparators. GoldenTree was underwritten, Starwood was agency, while the GoldenTree book had a smattering of retail.

The GoldenTree trade didn’t have the 144A docs, which have been a fairly standard feature of the last several CMBS deals, trimming deal cost and tightening up time to market. Extensive pre-marketing (all tranches featured protected orders) gave some sense of where the bonds would go, and whether the incremental 144A demand would make the difference.

Neither GoldenTree nor Starwood had especially big deals to place (£110.7m of triple-A versus £127m), but then the sterling securitisation market isn’t huge, and the sterling CMBS market still less so.

Lurking in the background is Blackstone’s Project Pecan, which, in contrast to the investment trust deals, is absolutely massive.

This is the refinancing for Haven Holiday Parks, a bundle of caravan parks and hotels, and last we heard will be at least £1bn in actual full stack CMBS, with more than £1bn of bank debt alongside it. UK real money investors in securitisation tend to be deep-pocketed, but this is an extremely large one to swallow.

The investment trust pipeline is finite, but it might not be finished just yet. Home REIT, which lets residential properties to charities and community interest groups and has a £422m book, is in managed wind-down and has received non-binding offers for its portfolio (complicated by a lawsuit from shareholders, and a lawsuit from the REIT against its former investment advisor).

Real Estate Investors plc, citing the “persistent discount between share price and NAV”, started a three-year orderly wind-down, while others are considering their strategic options. Schroders European Real Estate said in its last report that, “The Board’s priority in the coming months is therefore to identify the strategy which best positions it to maximise value for shareholders, and a further announcement will be made in due course.”

That’s as vague as you’d expect in an annual report, but there’s still everything to play for! There’s not going to be enough REITs for everyone, get 'em now while they’re still cheap!

HP source

Back in October 2023, we were very excited about the reforms to UK insurance regulation, dubbed Solvency UK — particularly the creation of a new “Highly Predictable” (HP) asset bucket which loosens the strictures of the Solvency II matching adjustment, and opens the way for more UK insurance investment in structured or callable assets.

At the time wee talked to PineBridge’s Vladimir Zodrovenin, head of insurance solutions EMEA, about the potential to adapt CLO structures to suit the new regime, tweaking structures to, for example, increase duration and reduce prepayment risk.

Fast forward to today (UK Solvency went live at the end of last year, with the MA reforms from June) and we now have a real example of this kind of structuring, in the shape of Ares European Direct Lending CLO 1.

This was privately placed last month, and represents the first publicly rated reinvesting private CLO in Europe, though the distribution was fairly narrow.

9fin’s CLO team have been digging into the deal, and it’s effectively the conversion of a private credit SMA into a more insurance-friendly format. The bonds were placed with a single UK insurer, specifically this one (sorry if you’re not a subscriber but the CLO team didn’t want it out there just yet; ask and I’ll tell you).

Structural modifications include exactly the kind of thing Zodrovenin discussed: low coupon bonds placed at a hefty discount to push up the bond duration, staggered maturities, robust call protection, and coupons which are non-deferrable down the stack. It’s not as certain as an old-style matching adjustment bond with fixed coupons and make-whole, but it’s a lot more predictable than a classic CLO.

According to Luxembourg filings, there’s another one in the works already from the same issuer (we don’t know if it will be the same investor) and potentially a deep well of future possibilities. It’s hard to get figures on exactly how big the UK life insurers are in private credit.

Most of their direct holdings tend towards the version of private credit that’s more like IG infrastructure private placements or housing association bonds, rather than the version that’s levered middle-market LBO lending. But they’re likely to be big LPs in some funds featuring the latter, with some incentive to restructure these fund interests in a format that’s highly predictable.

This is an interesting bit of structuring (and a nice potential fee stream for rating agencies and lawyers), but it doesn’t exactly constitute a market.

The various parties to the Ares deal were keen to flex their involvement in a market first, which is understandable.

But just as we don’t consider the vast internal equity release securitisations housed on UK lifer balance sheets as part of RMBS supply, do fund-CLO conversions on insurer balance sheets really help develop a tradeable capital market in private credit CLOs?

On the other hand, as these deals become more established, why not cut out the middle man? If insurers will buy this kind of structure, skip the SMA and just sell them bonds in a syndicated process. HP days ahead!

Clap along

Pimco is at it again, winning the bidding for Santander’s Spanish RPL pool Project Flamenco, though Goldman Sachs, as risk retention provider, is getting the headline recognition — just like how Citi “bought” Project Jupiter with financing from Pimco. It’s legally right but economically… it’s Pimco.

Goldman we hear was a bidder in its own right earlier on in the process, and is supposedly amping up its activities, following a period of personnel turnover in the European mortgage group. Departures include Luca Lombardi, who departed at the end of 2023, Enrico Orlandi in early 2024 (now reunited), and Philip Aldis heading to Apollo in mid-2024.

Vanessa Resnick was named head of EMEA mortgage trading in May last year, with Mahesh Saireddy, head of mortgages and structured products globally, describing EMEA mortgages as one of the top growth areas identified by the firm — and the firm clearly wants to get its portfolio trading activities in Europe firing, as it also hired Pratik Gupta from Barclays.

Gupta started last week, so presumably had little if anything to do with the Flamenco process, but the problem for GS will be, as it is for everyone else, that Pimco is there, in size and at compelling prices. It’s possible for competitors to slip through the cracks; Pimco has less of a track record in Spanish portfolios generally, and as far as we know this is the west coast asset manager’s first Spanish RPL trade.

It’s a challenging market to get involved in — as one lawyer active in Spanish RPL securitisations put it, Spain is “allergic” to standardisation, and there’s little consensus on what constitutes 'market' in terms of representations and warranties, buyback rights, servicing transfers and the like. RPL portfolio sales generally leave the servicing in place, so striking an appropriate balance on these terms matters much more than in NPL books, and negotiation over these points can easily trip up or delay a sale process.

But Pimco certainly has the credit chops in-house, plenty of experience buying RPL portfolios elsewhere and, most importantly, an absolute ton of cash to invest and a habit of being the best bid.

Welcome to the Swiss

Swiss securitisation has never been a large market, and it’s also a odd market by European standards — it has (shockingly) fixed rate bonds, there is no specific securitisation law, no local risk retention rule, and a 35% local withholding tax, which can be claimed back by local investors but not by international accounts. This tax generally serves to keep local markets local.

On the other hand, financial instruments can be sold, in theory, to almost anyone, and Swiss debt offerings are often in CHF 5k (€5.36k) denominations, to be bought at any private bank office, rather than the institutional size 100ks normal in euros or the $200k minimum usual in a 144A US offering.

But now we have Emil Frey integrating Swiss supply into the euro mainstream, with the latest edition of the First Mobility shelf.

This is First Mobility Sarl, Compartment Swiss Lease 2025-1, to give it full title, because it’s in a Lux vehicle not a Swiss AG like the previous editions. It also has a full set of cross-currency basis swaps, rarely seen in the wild since the crisis, converting Swiss franc cashflows into euro-denominated principal and interest payments on both A and B tranches.

It’s a much larger deal than the previous issues from the shelf, at CHF 766.9m, compared with CHF 250m to CHF 306m in previous outings, and pricing looks attractively close to the euro mainstream. In the last ECARAT DE Lease deal, senior notes priced at 64bps, tighter than the Swiss debut, but not by much.

It’s not a perfect comparison, for several reasons. ECARAT is a captive shelf for Stellantis, which is an argument for coming tighter, and this was a full stack risk transfer deal, not a pure funding trade. Both deals have residual value securitised, though in both cases this is derisked somewhat by dealer buyback guarantees. Perhaps the credit strength of family-owned Emil Frey’s dealer network is different to the credit strength of the Stellantis network, making the dealer guarantee worth slightly less, but this is angels on the head of a pin stuff, and I’d be amazed if anyone was fighting for basis points for this reason.

What’s hard to back out from the deal documents so far is how expensive those bespoke cross-currency BGS contracts might be. Swap economics are easier to hide the more bespoke the instrument is; Emil Frey will know how expensive the overall funding looks back in Swiss franc, but it won’t know for sure how much padding is built in versus some theoretical mid-market rate.

Most banks retreated from the bespoke swaps business, be that cross-currency BGS or perfect asset swaps on leverage loans, so I’d imagine the economics were attractive. That shouldn’t obscure the benefits of the big picture here; the euro-denominated structure finance market now has another country ready to issue!

Cheers in Churchill Place

We liked Ferovinum’s alcohol-backed ABS very much — it’s an appealingly unusual asset, and it’s appealing to see products on a supermarket shelf and know about the financing behind them.

It’s also a particularly complex and intellectually satisfying deal to have been involved in, a real blank-sheet-of-paper piece of financial engineering solving multiple parallel problems of tax, asset security, regulatory regimes, flexibility, and valuation, and delivering a rocket fuel solution for the client.

For bankers or lawyers that enjoy this kind of thing, it’s a lot more rewarding (if a lot more time-consuming) to get this away than the 25th mortgage warehouse.

We spent a lot of time discussing it two weeks ago, so we’re not going to rehash it all here, but we’re finally able to give credit to the “leading investment bank” which financed the facility alongside Pollen Street Capital.

It is of course Barclays — and to be honest, we should have guessed. Barclays already participated in Ferovinum’s UK ABL facility, putting it in pole position with the client, and we wouldn’t expect the other ABL lenders NatWest and Shawbrook, to be best bid on this kind of pan-jurisdictional (US, EU, UK and eventually Australia) structure.

We think it’s more surprising that Barclays didn’t want to take credit where it’s due. Supporting a fast-growing British fintech involved heavily in Britain’s national hobby? This is wholesome stuff indeed.

We secretly hoped there was something funnier behind the mystery bank (First Bank of Abu Dhabi going rogue?), but we can only (belatedly) congratulate the Barclays folks for closing this one.

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