Asian Investment Seizes a Tenth of Russia's Commercial Real Estate Market

Investors from Asia and the Near East sprang from nowhere to make up 10 percent of investments in Russian commercial real estate in 2014, according to a study by real estate consultancy Cushman & Wakefield.

The numbers show "a trend of capital from Western Europe and the U.S. gradually leaving as players from the East enter," the report said, adding that Asian investors didn't close any investment deals in the Russian commercial real estate market in 2013.

As Asian investors made their entrance, European capital froze up, spooked by slowing economic growth and Western sanctions over Russia's support for separatists in eastern Ukraine.

European capital accounted for just 9 percent of total investment last year, down from 29 percent in 2013. Meanwhile Russian investors' share rose from 71 percent in 2013 to 81 percent in 2014.

Widespread concern over the state of Russia's economy dealt a harsh blow to the total volume of investment in commercial real estate, which fell to $4.2 billion in 2014, according to Cushman & Wakefield.

The market had seen $8.1 billion in investment in 2013 and $8.8 billion in 2012, according to consultancy Jones Lang LaSalle.

Cushman & Wakefield forecasts that investment will fall further to $2.5 billion in 2015, with some projects under significantly more pressure than others.

"Deals denominated in foreign currency have suffered to a greater extent from the current situation," said Irina Ushakova, head of capital markets at Cushman & Wakefield. The Russian ruble fell about 40 percent against the U.S. dollar last year and is still viewed as volatile, adding significant uncertainty to any projects using foreign currencies.

Projects with ruble-denominated investment and cash flows have a higher chance of reaching closure, Ushakova said

Bullish CMBS Appraisal Sparks Questions

The appraisal of an extended-stay hotel portfolio collateralizing a $570 million mortgage that was securitized last week has raised the eyebrows of investors.

 

Blackstone acquired the portfolio from Clarion Partners for $800 million in August. But the Cushman & Wakefield appraisal cited by lenders J.P. Morgan and Deutsche Bank valued the properties at almost $100 million more.

 

The valuation gap is unusual. When real estate has just changed hands, the appraised value typically mirrors the purchase price. The issuers of securitizations, in turn, use that value to determine the leverage ratio of the mortgage on the properties. Because the high Cushman valuation increased the denominator, the stated loan-to-value ratio was lower than it would have been if the purchase price was used. Some investors view the higher valuation as an example of an ongoing slide in loan-underwriting standards.

 

The loan was the senior portion of a $675 million floating-rate debt package that J.P. Morgan and Deutsche originated on Aug. 12 in conjunction with Blackstone’s acquisition of the 47-hotel portfolio. The two banks securitized the senior loan last week via a stand-alone deal (BLCP 2014-CLRN), with the investment-grade classes pricing in line with the dealers’ asking prices.

 

In addition to its $800 million purchase, Blackstone incurred $35.1 million of closing costs and funded $10.1 million of upfront reserves, bringing its total outlay at the closing to $845.2 million. Blackstone has also indicated that it plans to spend $63 million on renovations over four years.

 

The securitization documents cite multiple appraised values that Cushman provided on July 1 at the behest of J.P. Morgan and Deutsche. The brokerage supplied valuations based on whether the hotels were appraised individually or were sold to a single buyer willing to pay a premium to buy in bulk. Cushman said the "as-is" value was $833.7 million on a one-by-one basis and $885.1 million on a portfolio basis.

 

The brokerage also supplied "hypothetical" appraised values that factored in "all planned capital dollars" that Blackstone will put in reserve to upgrade the properties. Using that hypothetical standard, Cushman valued the portfolio at $844.8 million on a one-by-one basis and $896.3 million on a portfolio basis.

 

Of the four potential valuations, J.P. Morgan and Deutsche chose the highest. As a result, the loan-to-value ratio highlighted in the deal documents was 63.6% — or $570 million divided by $896.3 million — on the senior debt and 75.3% on the overall debt package. By contrast, had Blackstone’s actual $800 million purchase price been used, the leverage ratios would have been 71.3% and 84.4%.

 

While it’s possible that Clarion left a lot of money on the table by selling the 5,908-room portfolio to Blackstone at a below-market price, real estate pros say that seems highly unlikely, given that both companies are sophisticated institutional investors and that Clarion conducted a broad-based auction via a major brokerage, JLL.

 

Instead, investors contend, the use of the most-optimistic appraisal is another sign that commercial MBS issuers are pushing the envelope on credit quality. They view the use of hypothetical valuations as akin to "pro forma" underwriting, under which lenders make credit decisions based on projected increases in property cashflows, rather than in-place income. The use of pro-forma accounting was widespread as the CMBS market was peaking in 2007 and contributed to the subsequent crash.

 

 "They call it a ‘hypothetical’ appraised value — that in itself should be a red flag," said one investor. "If you want to know what the true LTV is, you might want to use the actual purchase price."

  

J.P. Morgan, Deutsche and Cushman declined to comment on why the appraised value was so much higher than Blackstone’s purchase price. Blackstone and Clarion also had no comment. But the boilerplate fine print in the preliminary prospectus for the securitization effectively warns investors that the cited valuations may have little connection to reality. "Information regarding the appraised values of the Properties is presented in this offering circular for illustrative purposes only and is not intended to be a representation as to the past, present or future market values of any of the properties," the prospectus says.

 

Other recent stand-alone securitizations that financed the acquisitions of properties or portfolios cited appraised values that were equal or close to the purchase prices. Some examples: 

• A Related Cos. partnership bought two office condominiums at Time Warner Center in Manhattan from Time Warner for $1.3 billion (plus $35 million of closing costs). Lead manager Deutsche cited a Cushman appraisal of $1.3 billion (COMM 2014-TWC).

 

• A Mark Karasick partnership bought the leasehold interest in the Mobil Building in Manhattan from Hiro Real Estate of Japan for $900 million (plus $59.5 million of other costs). Lead manager Morgan Stanley cited a Cushman appraisal of $900 million (MSC 2014-150E).

 

• Blackstone acquired two hotel portfolios from separate sellers — an OTO Development partnership and special servicer CWCapital — for a total of $503.6 million, plus $14.7 million of other costs. Lead manager J.P. Morgan cited a combined appraised value of $513.6 million (JPMCC 2014-BXH).

Big Players Look to Acquire, Not Lend On, Asian Real Estate

The Asian distressed market business might be the Godot of real estate finance. Investors and analysts seem to have been waiting endlessly for opportunities in non-performing loans and distressed debt. But waiting in vain, it would seem.

Appetite for Chinese and other Asian troubled assets is booming. So far this year, funds have raised over $2 billion to invest in Asian debt, up from $303 million in 2013, according to London-based researcher Preqin. According to survey from the firm, in February 2014, 17 percent of real estate investors based in North America focused on Asian investments, up from 9 percent in July 2013. Among European investors, 41 percent targeted these investments in February 2014, up from 18 percent the previous year.

But looking specifically at the real estate market, as of September 17th, only four real estate debt-focused funds had closed and raised capital for $800 million, up from $700 million from last year, but far from the $2.1 billion in 2012.

“Be it Japan’s commercial mortgage–based securities tail, cash-starved Chinese developers, or failed REITs, the reality has generally fallen short of expectations,” according to PwC’s report Emerging Trends in Real Estate for 2014. “To some extent, this reflects a cultural reluctance to allow compromised deals to be recycled by the market as they are in the West.”

While international investment in non-performing loans is playing a big part in the recovery story in Europe, rules banning foreign investors from buying real estate debt in some jurisdictions, like China, and aggressive local banks have limited Western investment in the Asian real estate debt market.

“The market has recovered very strongly,” Priyaranjan Kumar, regional director for Capital Markets at Cushman & Wakefield Asia Pacific, told Mortgage Observer. The recovery meant that local banks were able to refinance their loans without selling NPL portfolios—limiting the potential bargains for opportunistic investors. “Prices are at pre-crisis level or higher, the volumes of exchanges are at pre-crisis level or higher… Asian banks are in very good health,” Mr. Kumar said.

Loan-to-value ratios have been growing across Asia. According to PwC, they commonly register 60 to 65 percent across Asian markets and can reach 80 to 85 percent in Japan. The crisis affected mainly foreign banks, which often just opted to leave the real estate debt sector in Asia, while local banks were still clinging to their business. Foreign banks’ share of the real estate lending market in Asia dropped from over 40 percent before the crisis to less than 30 percent now, according to Mr. Kumar.

There are some exceptions, particularly in the Japanese and Australian markets (Australia is frequently grouped in with Asia, despite the fact that it is its own market). For instance, between 2010 and 2012, Fortress Investment Group raised $2.4 billion for two Japan funds targeted to buy real estate debt backed by apartments, retail and hotels. The first fund, Japan Opportunity Fund, which focuses on nonperforming or sub-performing debt from Japanese banks, recorded annualized inception-to-date net IRR of 27.9 percent through June 30, 2014, Fortress said in its latest earnings call.

And between 2011 and 2013, Axa Real Estate Investment Managers raised $390 million for two Japan commercial-property loans funds.

Lately, the most active players among real estate-debt funds were Kotak Realty Fund and Piramal Fund Management, which are both Indian-based and focused on the Indian market. A lack of financing from Indian banks for real estate development has resulted in a funding gap that has created demand for alternative debt. In 2014 Kotak and Piramal have closed a $400 million and $164 million fund, respectively, focused on Indian distressed and opportunistic debt, according to Preqin.

But the largest international opportunistic players right now are looking at acquiring assets, not lending. Among private equity investors, Blackstone Group is expected to close Blackstone Real Estate Partners Asia, the largest private equity real estate fundraise for the region, by the end of the year. The fund had a target of $4 billion and a hard-cap of $5 billion. At July 2014, it had already raised $4.2 billion.

Langley emerges as hot prospect for business developers

Summary: Vancouver based Madison Pacific Properties purchased 12 office/industrial properties for $60 million, including three in Langley, where Madison hopes to capitalize off of the otherwise expensive real estate for regional industrial manufacturers who want to shift eastward toward lower leasing costs, but are stifled by the Agricultural Land Reserves surrounding Vancouver.  Specifically, the Langley neighborhoods of Clayton Heights and Willoughby are growing at "unbelievable rates" according to Cushman Wakefield Senior VP of Industrial RE.  (He projects future growth in Pitt Meadows, Abbotsford, and Mission.)

The 700-acre Gloucester Industrial Park, in northeast Langley on the Trans Canada, and connecting to all major railway lines, goes for $950,000 to $1.1 million per acre plus development cost charges and site preparation.Photo by: Handout, Cushman Wakefield

Vancouver --(Vancouver Sun)--

In a blockbuster cross-Canada deal of more than $60 million, Madison Pacific has bought 12 office/industrial properties, including three in Langley. With the Agricultural Land Reserve severely limiting development closer to Vancouver, the Fraser Valley township is fast emerging as a B.C. commercial real estate hotspot, according to industry experts.

“The Langley site in particular is strategic in that it represents 21 contiguous acres of land with over a kilometre of frontage on the Trans-Canada Highway,” says Robert Gritten, principal at Avison Young, which led the 12 deals for Madison Pacific. “As Madison Pacific invests for the long term, the opportunity this site offers for redevelopment is dramatic.”

Like all properties in the deal – to a total of 540,000 square feet of office/warehouse/enclosed storage space on 98 acres of land – the Langley ones have only 13-per-cent site coverage, compared to traditional industrial averages of 40-50 per cent. All are tenanted by Burnaby-based Taiga Building Products.

Referring to “the stifling effect” on Metro Vancouver of the ALR restrictions established by the Barrett NDP government starting in 1973, Gritten says: “As a result of this supply-demand imbalance, yes, we are more expensive than most, if not all, markets in North America. The geographic advantages that make this city such a great place to live actually work to a disadvantage when we attempt to meet the demand of our industrial manufacturers and distributors. They want and need to be here. We are the gateway for Canada to Asia, but it is so difficult to secure suitable premises for most of our user clients.”

No surprise, then, that developers are turning hungry eyes to Langley, with “its good supply of vacant land,” Gritten says. “It’s a natural extension.”

“In looking at demand in the Lower Mainland, we’re seeing a substantial eastward shift,” says Bill Hobbs, senior vice president, Industrial, with Cushman Wakefield. “Based on the tight supply, one looks farther out in valley. Port Kells [in northeast Surrey] has been substantially eroded in terms of available product. There’s significant eastern migration into Langley Township.”

Hobbs sees the Langley neighbourhoods of Clayton Heights and Willoughby “growing at unbelievable rates” as businesses shift east. The 700-acre Gloucester Industrial Park, in northeast Langley on the Trans Canada, and connecting to all major railway lines, goes for $950,000 to $1.1 million per acre plus DCCs (development cost charges) and site preparation.

For Madison Pacific, the nation-wide deal through Avison Young “was an opportunity for us to acquire a geographically diverse portfolio with good leveraged returns in properties that have long-term additional development potential,” says President and CEO Marvin Haasen. “One of our objectives has been to expand beyond the Lower Mainland where the majority of our assets are located. We have achieved this objective with the purchase of this portfolio, as 60 per cent of the properties are located outside the Lower Mainland.”

Still, Haasen says, “there continues to be strong investor interest for Lower Mainland properties. Demand is high while the supply of available properties is limited, so pricing is more aggressive.” He likes the three Langley properties for their “strong fundamentals.”

For Hobbs, the increasing strength of Langley was inevitable from the moment politicians completed their “tightly drawn” ALR lines in 1975. “I’ve been calling this one for 26 years” – his time in the business to date. “Now we’re seeing a doubling of the population. Now all of a sudden we’re going to see continued growth in the next one to two decades.”

According to a Cushman Wakefield document, Langley’s economy is not only fast-growing but increasingly diverse, with a favourable tax base, skilled labour force, state-of-the-art manufacturing industries, a strong retail and service sector, and many internationally operating and export-oriented companies moving in. These factors, plus “the proximity of Langley to Vancouver, Seattle and overseas markets have made the Langley area attractive for investment and development.”

But the migration isn’t stopping at Langley. Watch for a surge into Pitt Meadows and Abbotsford, and even north into Mission, Hobbs predicts.

The other properties acquired in the mammoth Madison Pacific deal are in: Kelowna; Edmonton (two); Calgary; Sudbury, Milton and Monetville, Ontario; Boucherville and St. Augustine, Quebec.

The transaction, which closed Sept. 12, involved eight Avison Young offices across Canada. Avison Young also represented Taiga Building Products in 2006 when the portfolio was sold to Argo Ventures.

http://www.vancouversun.com/business/commercial-real-estate/Langley+prospect+commercial+real+estate/9027569/story.html