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Haberdashers Hall, London 21st May 2014 Please be aware that these training notes contain general information relating to issues affecting LPA Receivership law and practice only and do not constitute legal advice. For any specific issues you are recommended to consult a solicitor or other appropriate professional adviser. Slide 2 Paul Batho NARA Chief Executive Please be aware that these training notes contain general information relating to issues affecting LPA Receivership law and practice only and do not constitute legal advice. For any specific issues you are recommended to consult a solicitor or other appropriate professional adviser. Slide 3 Recovery and Evolution Recovery Impact on NARA and the work of receivers Bad news? Evolution of the role of property receivers of NARA Slide 4 The Recovery Since May 2013 Recovery of the market Confidence returns Investors, lenders, occupiers active A genuine recovery? Economic basis, interest rates A new market or the next boom/bust? Slide 5 The Recovery implications for recovery specialists Receivership appointments slowing demand reported A recovery-based mini-boom? Impact of rising interest rates? A new market New lending New approaches Timing? Slide 6 NARA 2013/4 developments Growing RPR membership (23 in 2014) New Council structure Improved web site Financial position Exams, regulation and the JRC Membership numbers Slide 7 Slide 8 NARA Evolution The number of appointments will decline but.. Slide 9 NARA Evolution Policies for 2014/5 Promote and supporting receivers To lenders To opportunity funds To government and other institutions Work with Association of Property Lenders A receivers skills relevance to the new lending market Continuing relevance of RPR members Encouraging Associate and Affiliate membership Slide 10 NARA - Future NARA Membership expertise in property and finance Focussed Council structure Well funded The skills and ingredients to serve a changing market Slide 11 Slide 12 Peter Bill Evening Standard Columnist www.planet-property.net Please be aware that these training notes contain general information relating to issues affecting LPA Receivership law and practice only and do not constitute legal advice. For any specific issues you are recommended to consult a solicitor or other appropriate professional adviser. Slide 13 A cracking good read - David Sleath, Segro chief executive Sycophantically arse-licking - Mr. Waterstone, anonymous bastard WWW.PLANET-PROPERTY.NET Slide 14 LESSONS FROM BOOK-LEARNING Beware of linked equity & debt deals Beware of tall dark strangers Beware of bright young things Slide 15 WHERE ARE WE NOW? Starting from June 2007 Capital growth stands at two-thirds of peak values Rental values are stuck at 91% of June 2007 figures Starting from June 2009 Capital growth is up 20% Rents remain four percent below pit levels Slide 16 BANG Dear God, just let there be one more property boom. I promise I wont piss it all away this time Harvey Soning, property veteran Slide 17 BOOM Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria Sir John Templeton Slide 18 MONEY, MONEY, MONEY A billion here, a billion there, and pretty soon youre talking about real money Everett Dirksen Slide 19 HOW MUCH MONEY COSTS FINANCE COST FOR PURCHASING PRIME OFFICE PROPERTY Slide 20 THE FIRST SIGN OF THE JITTERS LOAN TO VALUE RATIOS FOR PRIME OFFICE PROPERTY Slide 21 PLANET PROPERTY Inside every working anarchy, theres an old boy network Mitchell Kapor Slide 22 DEVELOPERSS WORLD People who enjoy meetings should not be in charge of anything Thomas Sowell Slide 23 WHEN DEBT MATCHED NET ASSETS Land Securities, British Land and Hammerson Combined assets and debt Slide 24 BIG THINKERS You have to think anyway, so why not think big? Donald Trump Slide 25 AGENTS The propensity to truck, barter and exchange one thing for another is common to all men, and to be found in no other race of animals - Adam Smith Slide 26 AUCTIONS Large groups of people are smarter than a few experts - James Surowiecki, author of The Wisdom of Crowds Slide 27 AFTERMATH Experience is the one thing you cant get for nothing - Oscar Wilde Slide 28 HERE WE GO AGAIN? The reality is that a new generation comes along very quickly with lots of ideas. Then we get back into the same cycle once again. Ian Coull, former chief executive, Segro BUT WHEN, HOW, WHERE... Slide 29 Slide 30 John Muldoon, MRICS Hatfield Philips International Please be aware that these training notes contain general information relating to issues affecting LPA Receivership law and practice only and do not constitute legal advice. For any specific issues you are recommended to consult a solicitor or other appropriate professional adviser. Slide 31 Recovery and Evolution Loan servicing and CMBS The Role of the Special Servicer Evolving Real Estate Debt Market The Light Touch Approach to RE Workouts Non-Performing Loans Sales A New Client Base? Slide 32 Hatfield Philips Loan Servicing & CMBS HPI Active Servicing Portfolio Hatfield Philips International (HPI) is Europes longest serving commercial real estate loan Servicer, having managed over 61 billion of assets since its inception With a staff of over 120 based in London and Frankfurt, HPI has active workout exposure in 16 European jurisdictions and has worked out over 5 billion of distressed debt HPI is owned by Starwood Property Trust, which is the largest mortgage REIT in the U.S. with a market capitalization of $4.8 billion (NYSE: STWD) Active servicing portfolio consists of 3,000 properties (286 loans) totalling AUM of 19 billion HPI is the largest Special Servicer in Europe (1)Moodys EMEA Servicing Report January 2014 / *Securitised loan balance is in MM as per transfer date Data as of 31 December 2013 Slide 33 Apply Funds through Waterfall Take Control Primary Servicer Market Property w/Financing Modify Loan New Sponsor Option 4 ENFORCE Option 3 LOAN SALE DPO Option 1 LOAN CORRECTION Share Pledge Fixed and Floating Charges Option 2 LOAN MODIFICATION Asset Management Quick Sales Sale of Stabilised Property Option 3a Borrower Led Sale The Role of the Special Servicer Evaluating the options to maximise returns Slide 34 Evolving Real Estate Debt Market The peak years for European CMBS issuance were 2006 & 2007 which saw 60bn and 45bn originated respectively. Post the collapse of Lehman's in 2008 origination virtually ceased. (Source: Commercial Mortgage Alert May 2011) Estimates for 2014 CMBS Issuance vary but point towards a range between 7bn -15bn of new originations in 2014 (Source: James Wallace, Costar, 12th December 2013) New sources of finance have emerged to fill the void left by the reduced CMBS issuance and the continuing absence of many bank/balance sheet lenders: Private Equity Debt Funds Listed Debt Vehicles Insurance Companies Mezzanine Lenders Corporate Bonds Despite the slow recovery of the CMBS Market and many banks still focusing on deleveraging their books, liquidity is returning and there is increasing Real Estate debt available. To illustrate this, HPI have boarded 177 loans totalling 4.1 billion for six new clients within the last 18 months Slide 35 The Light Touch Approach to RE Workouts Collegiate approach verses One Stop Shop instruction A continual and active line of communication between Special Servicer and Fixed Charge Receiver/Administrator Multi-disciplinary teams from different practices and service providers Asset Management placed at the centre of workout process Robust Business Plans regularly reviewed Hold, Asset Manage then sell verses sell now - Capex requirements/Capex availability? Market driven exit strategies Slide 36 Non-Performing Loans Sales A New Client Base? Since 2011, HPI have underwritten NPL Projects with a UPB of circa 34.1bn Cushman & Wakefield research suggests that European loan sales will exceed the 40bn mark in 2014 a 32% increase on the 2013 level. (source: C & W, 05.02.2014) Active PE buyers include Apollo, Blackstone, Cerberus, Colony Capital, Deutsche Bank, Kennedy Wilson, Lone Star, Marathon and Oaktree....and there are new entrants still looking to join upcoming bid processes. PE buyers typically adopt a hands on approach and understand the loan and real estate metrics. Cost of capital and NPV analysis drive their workout strategies speed of execution is key. PE NPL buyers have more flexibility than the vendor banks - Strategies range from DPOs, Enforcement to Loan to Own Slide 37 In Summary The markets for debt and workout services are evolving as the economic recovery gains pace: Liquidity has returned to real estate markets from new sources There are potentially new clients for workout specialists A dynamic client base will require advisors to adopt greater degrees of flexibility Slide 38 Slide 39 David Marks Co-Managing Partner, Brockton Capital LLP and President, British Property Federation Please be aware that these training notes contain general information relating to issues affecting LPA Receivership law and practice only and do not constitute legal advice. For any specific issues you are recommended to consult a solicitor or other appropriate professional adviser. Slide 40 40 CONFIDENTIAL, PROPRIETARY AND TRADE SECRET 1. Market Conditions: 2005 2008 2. Market Conditions: 2009 2014 3. What happens when the sardine cans are opened up? (Sam Zells dictum) 4. UK Outstanding Property Debt, 2014 TABLE OF CONTENTS Slide 41 41 CONFIDENTIAL, PROPRIETARY AND TRADE SECRET 1.Market Conditions: 2005 2008 The leverage in the system was akin to cocaine; Lehman bought it to an abrupt end. Slide 42 42 CONFIDENTIAL, PROPRIETARY AND TRADE SECRET 2. Market Conditions: 2009 2014 QE, six years of ZIRP, Help to Buy, is akin to heroin. But policy makers dont want an abrupt end, more a gradual come down via tapering, signaling and gradual rate rises. Slide 43 43 CONFIDENTIAL, PROPRIETARY AND TRADE SECRET 3. What happens when the sardine cans are opened up? (Sam Zells dictum) After 12 months of inadvertent ownership, nothing much changes. After 7 - 8 years, leases are expiring, M + E is shot, obsolescence has kicked in and the capex has been deferred. And deferred again. And the sardines begin to stink. Slide 44 44 CONFIDENTIAL, PROPRIETARY AND TRADE SECRET 4. UK OUTSTANDING PROPERTY DEBT, 2014 The banks: perhaps halfway through their bad books? LENDER ESTIMATED 2013 UK LOAN BOOK % OF OVERALL UK MARKET RBS (2) C.30BN9% LBG (3) C.27BN8% NAMA (4) C.7BN2% CMBS (GENERALLY) (5) C.35BN11% TOTALC.99BN30% The legacy problems are being resolvedthe equivalent figure was c.172 billion last year, a reduction of c.42% through a combination of repayment, amortisation, loan sales, asset sales, and write-downs. But what is left and what is the clearing price for these remaining assets that have not yet been worked out? TOTAL UK PROPERTY DEBT 2013 C.325BN (1) NAMA C.7B N CORPORATE PROPERTY AND COVERED BONDS C.39BN RBS LOAN BOOK C.30BN LBG LOAN BOOK C.27BN TOTAL UK CMBS OUTSTANDING C.35BN DTZ estimate there is around 541 billion of UK commercial real estate in total invested stock, resulting in around 60% LTV leverage overall. (Overall is key. Some investors are all equity. Some are 100%+ LTV.) The UK CRE debt market is (still) highly concentrated. The four elephants in the room (still) comprise (1) : The size of each circle represents its portion of the total UK CRE loans outstanding (2013) (1)Source: Brockton Capital estimates using multiple sources inc. DTZ Money Into Property, De Montfort University research, Savills Debt Market Research, and company annual reports (2)RBS Annual Results, 2013 (3)The UK Loan Book for LBG is for financial year ending 2013 (4)NAMA Annual Report 2012 (5)De-Montfort University Commercial Property Lending Market Report: Mid-Year 2013 Total (2013) UK Property Debt (1) Slide 45 Slide 46 Daniel Van Gelder Co-founder Exemplar Chairman, the Westminster Property Association Slide 47 A few key messages not enough construction activity to satisfy demand offices still under attack from residential occupier demand increases construction costs going up market risk abounds, but likely to sustain Slide 48 Slide 49 Slide 50 Slide 51 Source: CBRE West End Take Up Annual Take-up (million sq ft) 2004200520062007200820092010201120122013 4.4 4.74.93.63.14.74.33.54.0 Slide 52 West End speculative developments, >50,000 sq ft Totals reflect schemes in chart Source: CBRE 2014: 0.4m sq ft 2015: 0.7m sq ft 2016: 1.9m sq ft 2017: 1.0m sq ft 2018: 1.1m sq ft 000 sf Slide 53 Offices to Residential Slide 54 Occupiers arriving in Central London Slide 55 Commuters coming in to Central London Slide 56 Pressures on Construction Costs Slide 57 Construction Cost Inflation Slide 58 thinking about risks: political risks mayoral & general elections 2015 economic risks interest rates etc global risks London compared to other locations building specific risks obsolesence Slide 59 A few key messages not enough construction activity to satisfy demand offices still under attack from residential occupier demand increases construction costs going up market risk abounds, but likely to sustain Slide 60 Daniel Van Gelder Co-founder Exemplar Chairman, the Westminster Property Association