The development financing of a shopping scheme in the country demonstrates banks’ returning appetite for real estate debt.
There are signs Spain’s banks are prepared to finance commercial real estate activity that had been considered off-limits after the global financial crisis.
Take the financing of Lar España’s Palmas Altas shopping centre in Seville, announced last week. A club of domestic banks – Banco Santander, Banc Sabadell, Liberbank and Unicaja Banco – provided a €98.5 million development facility. It is a type of deal not seen since 2007, before which Spanish banks routinely financed construction schemes.
However, the country’s banks have spent recent years improving their balance sheets, offloading the billions of euros of toxic assets which stood as the legacy of pre-crisis reckless lending. Last year, two mega-deals involving sales of very large or entire non-core real estate books by BBVA and Santander were closed. More recently, in June, Caixabank sold 80 percent of its real estate assets – with a net book value of €6.7 billion – to private equity fund Lone Star.
The clean-up is allowing banks to restart their real estate lending activity. The Palmas Altas deal is an important one. It demonstrates Spain’s banks are bringing liquidity to a property sector which has shifted from being opportunistic to institutional. More importantly, it shows they are keen to finance property on a selective basis, with conservative terms.
While 10 years ago, commercial real estate financings were merely based on valuations, banks’ focus now seems to be on other criteria to measure the performance of the asset, such as the tenants and the sponsor. That is wholly appropriate, given the problems created by last cycle’s lending practices.
As with every scheme, there are risks. Building a new shopping centre when retail in many economies is evolving towards e-commerce is an obvious one. However, the fundamentals of the project look solid. The sponsor, Lar España, achieved a 21 percent value uplift on its retail portfolio in 2017. The scheme, which is due to open in spring 2019, is 63 percent pre-let, with 90 percent occupancy targeted by year-end.
While Spanish banks clearly believe in the business plan for the asset, it is notable they have decided to spread the risk by financing as a club deal of four lenders at 65 percent loan-to-cost, as implied by the estimated construction costs of the asset at €151.6 million, according to Lar España’s latest financial results.
The deal resembles the conservative financings seen for Spain’s new residential developments, in which banks demand proven pre-sale levels and lower LTC levels. It is a stark difference to the 100 percent-plus leverage applied to schemes during the housing bubble.
That period saw Spain’s domestic lender base scared off. The recovery of the market has brought them back - albeit in a more selective manner than before.
Optimus Global Investors acts as a partner to real estate investors and developers, helping them to source, structure and negotiate the most competitive financing terms on the market. Optimus arranges funding across the capital stack including traditional senior debt, stretched senior, mezzanine, equity and long-term facilities.