UK: MoFoREAL Q1 2022

Welcome to the latest edition of MoFoReal, our newsletter highlighting recent activities and other developments in MoFo's European Real Estate team. In this edition, MoFo's London real estate finance lawyers take a look back at 2021 and offer up their thoughts on what the next 12 months might hold.

As always, we hope you enjoy reading MoFoReal and would really appreciate your feedback and suggestions for future issues.

MoFo Real Estate Finance: Goodbye 2021 & Hello 2022

Looking Back

2021 was certainly an eventful year both for the European real estate market (as it adjusted to the ramifications of the coronavirus pandemic as well as the governmental responses to it) and in turn for our real estate finance lawyers. Alongside working with clients across a number of jurisdictions and asset classes, we also managed to expand the team by hiring associates Luisa Farmer and David Spencer; a great result given the fight for legal talent at the moment!

If nothing else, 2021 reminded us that, more than ever, real estate is not a homogeneous asset class. Some historically "alternative" sectors boomed (for instance, logistics, life sciences, student accommodation and data centres), whilst other more traditional sectors (such as retail and office) were those most exposed to, not just the pandemic, but doubts over the future of working and shopping.

We have seen strong interest in prime office space with good Environmental, Social and Governance (ESG) credentials and worked on both performing and distressed portfolio deals in the retail park space. We have also seen pricing on logistics assets raising questions with investors. Notwithstanding the fact that many hospitality metrics were still down as the year progressed, the question that many clients were asking at the start of 2021 - "where are all the distressed hotel deals?" - went sadly unanswered...

Within favourable asset classes, 2021 saw an unprecedented rebound in capital investment. There was activity across the major European jurisdictions from clients looking for opportunities to deploy their capital in a very competitive environment. This pushed up asset prices and meant speed and certainty of execution were more important than ever.

The team had a busy year advising clients on a combination of new deals as well as assisting in the development of their existing portfolios. We saw particular activity in the residential sector - both build-to-rent (BTR) and build-to-sell models, alternative living assets such as student accommodation, as well as investments in development lending and housebuilding platforms – and, mirroring the market generally, clients were also particularly active in logistics. We also saw a strong pipeline of development work, with longer term investments being made in a variety of sectors, but with large scale mixed use "destination" retail, office and leisure spaces particularly in focus.

Looking Ahead

Going into 2022, absent a more sustained and sharp increase in interest rates than is currently anticipated, we expect the momentum gained at the back end of 2021 to continue. The economic fundamentals that have underpinned real estate's recent attractiveness as an asset class (diversification benefits, potential for inflation hedging, the likelihood of a stable income stream, and the potential for higher yields relative to other assets with similar risk profiles) should all remain. Added to this, there remains a significant amount of pent-up capital looking to be deployed. We anticipate continued focus on the same asset classes as 2021, as well as on alternative assets like data centres and life sciences that have already kept our private equity real estate (PERE) colleagues busy.

In addition to seeing a higher volume of new money deals in 2022, we believe that sustainable lending and ESG considerations will significantly impact decision-making for both borrowers and lenders this year. Increased regulation is inevitable as ambitious net zero carbon goals have been set across Europe; the EU's Sustainable Finance Disclosure Regulation is just the beginning. Funds are already experiencing significant pressure from investors to meet certain ESG targets and the costs of de-carbonisation are yet to be fully appreciated.

Crucially, property valuations are likely to be impacted as few valuations currently factor in any de-carbonisation cost. This has the potential to affect the value of lenders' security and borrowers' ability to refinance leveraged property. Fortunately (or unfortunately depending on how you look at it), sustainability is going to be a part of the conversation going forward and we will be working diligently with our clients to address these immediate concerns and towards future-proofing their businesses.

In terms of lending trends, we expect to see a continuance of certain borrowers looking for higher leverage through alternative lending structures (such as mezzanine and loan-on-loan) as loan-to-value ratios (LTVs) offered by traditional lenders are still falling below pre-pandemic levels and equity providers in the market are offering far more expensive and onerous terms in return for capital. While intercreditor transactions are inherently more complex than traditional (single or syndicated lender) real estate finance deals, they can offer attractive returns for all stakeholders.

Look out for further information on alternative lending structures from the MoFo REF team in the next quarter.

Wishing you a very happy and healthy year ahead from MoFo. We look forward to continuing to work with you all in 2022!

MIPIM 2022

The MoFo European Real Estate Team will be at MIPIM from 15 – 8 March 2022. Do get in touch if you plan to be there too. We would love to meet up with you!

Team Expansion

We welcome Luisa Farmer, Jo Longley and David Spencer to the MoFo European Real Estate Team. Check out their bios below:

• Luisa joined the REF team in October 2021 after completing her training contract at Jones Day. Luisa loves food (all food) and is a travel enthusiast and avid hiker.
• Jo joined the PERE team in December 2021, having trained and then worked for many years at Bryan Cave Leighton Paisner. Jo loves going to the theatre, horse riding and yoga.
• David joins the REF team this February from Linklaters, where he worked for nearly 7 years. David is a Spurs season ticket holder, a keen skier and Italophile.

2021 Deal Highlights

Over the course of 2021, MoFo's European Real Estate Group was pleased to advise:

• Trinity Investment Management on the merger of its science real estate arm, Knowledge Factory, with the operating businesses of BioCity Group, to create We Are Pioneer Group (WAPG), the UK's first nationwide life sciences ecosystem, helping early-stage British businesses compete on a global stage not only by building and operating the dedicated life sciences and technology space they need to thrive, but also by helping to connect them with potential partners and promoting tech transfer between universities, research institutions and the private sector. With 600 companies across its portfolio, WAPG makes up 7.5% of the UK innovation ecosystem, integrating venture development, investment, and real estate with business-focused networks.
• Patron Capital VI, L.P. on its programmatic joint venture in the student accommodation sector with Curation Capital, an investor in and manager of student accommodation, co-living, private residential, and flexible office space. The transaction completed simultaneously with the joint venture's acquisition of Beech Gardens, a 250-bed development in Birmingham, which is the first in a series of investments proposed to be made through this new investment platform.
• BRAVO Strategies III fund on its joint venture with specialist real estate investment trust NewRiver REIT, which acquired The Moor, a primary retail and leisure destination in Sheffield, from Aberdeen Standard Investments for £41 million, with the potential to develop up to 1,100 build-to-rent residential units and up to 300 purpose-built student accommodation units on the estate.
• Patron Capital VI, L.P. on the establishment of a Nordic healthcare and education real estate investment platform, in joint venture with Swedish real estate investment management firm, Broadgate Asset Management, and that venture's first investment in a portfolio of 37 care properties in Sweden.
• MARK Capital Management Limited on the €25 million financing of its acquisition of retail units in a site under development in Monaco. The facility was provided by Banca Popolare di Sondrio and was implemented by way of an upsize of the existing financing package offered by that bank.
• Acacia Point in relation to the €150 million acquisition of fifteen buildings located on the Quinta da Fonte Business Park near Lisbon, Portugal in a joint venture with a global investment firm, Sixth Street Partners. The acquisition resulted from an existing joint venture between Signal Capital and Acacia Point, and was one of Portugal's biggest real estate deals of 2021. The team advised Acacia Point on its management contract with the park owner, and on its co-investment and joint venture arrangements with Sixth Street.
• Patron Capital VI, L.P. on its £100 million joint venture in the affordable housing sector, in a deal that saw Patron partner with Oak Housing, a registered provider and manager of affordable housing in the United Kingdom owned by real estate investment firms T&B Capital and BMOR. The transaction was completed simultaneously with the joint venture's acquisition of its first investment, the King Paget Hotel in West London, to be refurbished and repurposed for use as high quality affordable housing. .
• MARK Capital Management Limited on its circa €60 million senior financing and €20m mezzanine financing to acquire a portfolio of performing residential assets in The Hague in the Netherlands. The facilities were provided by funds managed by LaSalle Investment Management and are capable of being up-scaled to allow for the acquisition of further residential assets.
• Patron Capital VI, L.P. on the establishment of its Spanish co-living investment and management platform, Vandor Real Estate, as a listed Spanish REIT (SOCIMI), whose investment strategy involves the acquisition, refurbishment and repurposing of large apartments in centres of major cities in Spain (predominantly Madrid and Barcelona), and letting them out to multiple-occupancy, including students.
• Starwood Capital on its US$250 million joint venture with Echelon Data Centres to acquire and construct LCY20, a 30MW data centre on the outskirts of London, UK.
• Lendlease Retail LP, as funds counsel in relation to its winding up and the sale of its assets, including the fund-related elements of its sale of Touchwood Shopping Centre in the UK to Ardent.
• A global investment fund as lender in connection with a c.€60 million loan to finance the development of new student accommodations in Ireland and a c.£120 million refinancing of a portfolio of out of town retail sites across England and Scotland.