Making Waves: European Banks Exit, Asian Banks Sail On

Last fall, a group of lenders—including debt funds, insurance companies and international banks—competed for the $80 million assignment to refinance Lehman Brothers HoldingsOn The Ave Hotel on New York City’s Upper West Side.

Ultimately, the borrower tapped Singapore-based United Overseas Bank, which in the last two years has been behind several large office loans in New York and hotel loans on the West Coast, but which was essentially a newcomer to the city’s hotel lending scene. UOB inked the deal during the same late November week when Bank of China closed a $465.9 million loan on the iconic Plaza Hotel, after having refinanced the Mandarin Oriental Hotel for $170 million earlier in 2012.

Zach_Montoya_Eurocrisis2012In the first half of 2012, international banks have become the leading hotel lenders in the United States’ major metropolitan areas—New York, Los Angeles, Chicago, Boston, D.C. and San Francisco. In fact, they accounted for 36 percent of hotel lending in the Northeast, according to data from Real Capital Analytics, a provider of commercial property information.

Trophy hotels have traditionally been appealing for international lenders, which take pride in showing off the beautiful, and oftentimes famous, assets. Once upon a time, though, those lenders were European. Today the makeup of international lenders has shifted, and Asian banks seem to be the ones leading the charge—not just for hotels, but for several other high-quality asset types as well.

“In general, what we’ve seen is that European banks have not been as active this year as they have been historically,” Mathew Comfort, executive vice president and co-head of the Hotel Investment Banking group at Jones Lang LaSalle told The Mortgage Observer. Mr. Comfort led the team representing Lehman Brothers in the On The Ave transaction.

First burned by the U.S. mortgage crisis and then pressured by increasing banking regulations and euro zone woes, European banks have been reducing their investment in the U.S. for several years now. To some extent, Asian lenders are filling the gap. But while this might be true for properties such as iconic hotels and office towers in New York, in other markets the story is less clear-cut, several analysts and commercial real estate players said.

“International banks are focused on trophy assets,” said Dan Fasulo, managing director at Real Capital Analytics, adding that Asian banks are particularly careful about their investments. Asked who will fill the gap left by German or Irish banks, Mr. Fasulo mentioned insurance companies and U.S. banks. He also noted that “CMBS lenders are back again, and even the regional banks.”

In the last two years, between the third quarter of 2010 and the third quarter of 2012, German banks’ outstanding loans held in U.S. branches dropped by 37 percent, to a total of $7.2 billion, according to CMBS and mortgage data provider Trepp. Eurohypo, the real-estate lending unit of Commerzbank, and Westdeutsche Landesbank are among the banks that completely left the market. Irish banks including Anglo Irish Bank, Allied Irish and Bank of Ireland soon followed suit.

“Commerzbank has in place a run-down strategy for its commercial real estate assets,” according to a written statement from Nils Happich, a spokesperson for the bank. The lender’s global portfolio was reduced by 33 percent, from 84 billion euros as of December 31, 2009, to 56 billion euros as of June 30, 2012, and it aims to reduce it by an additional 40 percent by 2016. Just last May, Eurohypo sold loans for $740 million on 14 properties across the United States—including the retail component of the ultra-luxurious condo 15 Central Park West—to Wells Fargo, Blackstone and U.S. Bancorp.

“In the United States, our CRE portfolio has already been decreased from 5 billion euros as of December 31, 2009 to 2 billion euros as of June 30, 2012,” Mr. Happich continued in the statement. “We will continue our run-down strategy in the next years.”

Increasing regulations from national governments, the Basel III rules—which will require banks to hold more capital against loans secured on commercial property—and a still precarious euro zone situation have collided to create an uncertain future for European lenders. Four years after Lehman, the U.S. sees “the end of lending crisis,” asserted Mr. Fasulo, “while Europeans still have many innings to go.”

However, there are some exceptions. The most obvious is German giant Deutsche Bank, which has a significant CMBS program and, according to Real Capital Analytics, was involved in sales and refinancings totaling $11.6 billion in 2012, up from about $5.4 billion in 2011. The $300 million refinancing of Extell Development’s International Gem Tower and a $250 million acquisition loan on the office building Bank of America Plaza at 540 West Madison in Chicago are just a couple of the bank’s latest deals.

Some much smaller players such as Germany’s Helaba, Aareal Bank and DekaBank have been active as well.
DekaBank, “in Frankfurt, is primarily a fund manager,” explained David McNeill, the head of Deka’s New York branch. He added that its lending portfolio of about 7 billion euros overall and $3 billion in North America is relatively small.  “We cover New York, Boston, D.C., L.A., San Francisco and Seattle,” Mr. McNeill said. “Because we are small, we are very focused and targeted, using typically the highest-quality sponsors. Our product types are offices, primarily, and retail and hospitality.”

Last fall, Deka jointly funded a $364 million loan with HSBC on 1411 Broadway for Ivanhoe Cambridge. “We try to do between $500 million and $1 billion in gross origination, before syndication,” Mr. McNeill said. “We are not looking to materially grow our real estate portfolio. We are looking to maintain it and grow slightly.”

Asian lenders share a strategy that’s focused on specific assets. “German and Irish banks were all over the place—they financed a lot of different properties,” said Andrew Jagoda, co-chair of the New York real estate department at law firm Katten Muchin Rosenman, who works with many international clients. Not so Asian lenders. “They are very, very carefully making selective loans.”

Even though the activity of Asian lenders in the U.S. has been increasing, it’s still not at the level of the Europeans. Between the third quarter of 2010 and the third quarter of 2012, banks from China and Hong Kong increased their outstanding loans held in U.S. branches by 92.7 percent, while banks from Singapore increased them by 90.4 percent, according to Trepp. In two years, there has been a $3 billion increase for China and Hong Kong banks and a $700 million increase for Singaporean banks. But when totaled, these increases don’t reach even half of the $7.2 billion decrease in outstanding loans for German banks over that same time frame. At the end of the third quarter of 2012, German banks’ outstanding loans in the U.S. were $12.2 billion. At that time, the outstanding loans by Chinese banks in the U.S. totaled $6.1 billion.

Riaz Cassum, a senior managing director of HFF who is responsible for the group’s Global Capital Initiative, is among those who forecasts greater activity for Asian banks down the road. “We expect them to be more active,” he said, though he was quick to point out that, for now, “Bank of China is particularly focused on Manhattan high-quality office towers with long-term loans, not across the U.S.”

Last spring, Bank of China obtained the Federal Reserve’s approval to set up a branch in Chicago, which could theoretically lead to an expansion of its focus, said Jones Lang LaSalle’s Mr. Comfort. There is also room for other players. “Some government-owned Chinese banks have started to look around,” he said. Mr. Cassum foresees Asian insurance companies being future newcomers in the lending market. “Korean insurance companies are looking to do more lending,” he said. “The regulations in China don’t allow insurance companies to make real estate loans outside the country,” but, he said, this is likely to change in the next two to four years.

“You’ll see Asian banks becoming bigger, especially Chinese,” said RCA’s Mr. Fasulo. However, he warned against overestimating the impact of small German banks leaving. “We don’t feel the impact,” he said. “CMBS will continue to grow, as well as a crowd of other lenders, like debt funds.”

While on a visit to the offices of a German bank in Hamburg, Mr. Fasulo was struck by how the lobby’s walls were covered with postcards of the famous U.S. buildings for which the lender had provided loans. So now he thinks of the trophy hotels and office towers chased by international banks as “postcard assets.”

“European banks can’t go away for ever,” Mr. Fasulo asserted.  With a U.S. market that remains the world’s strongest for commercial real estate, Mr. Fasulo thinks that the appetite for these “postcard assets” will keep European lenders in the mix—to keep their literal and figurative lobby walls covered in these postcards.

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