May 2024

North America

·Starwood Capital has restricted fund redemptions by 80% for its Starwood REIT. Since 2018, monthly fund redemption limits for Starwood REIT were at 2% of net assets. However, Starwood has brought liquidity rights down to 0.33% of net assets, claiming this is not the time to be a forced seller. Restriction on liquidity rights is expected to be in place for 6-12 months as Starwood looks to preserve liquidity as it believes market are to recover soon. Starwood REIT has had to sell $2.8b in real estate assets to match fund redemptions at values below book value. However, they have also seen 7% quarterly rental growth across its assets in Q1 2024, which is ahead of its peer group of REITs. Major positions in the REIT include apartment blocks in Arizona, US, Norwegian logistics, loan secured against Blackstone’s Crown Resorts (Australian hotel and casino group).  (Source: Starwood, CoStar, 2024)

·Question marks around how Blackstone REIT values its assets arises. Blackstone REIT, largest property non-listed REIT in the US, has had many analysts concerned around how valuation appraisals on tis properties are conducted. Blackstone REIT’s NAV has fallen 8.1% since Aug 2022. Higher for longer interest rates have impacted discount rates and exit cap rates for valuation purposes, which has applied across the major US REITs. Blackstone REIT commented that they have widened their exit cap rates by more than 18% in rental housing and 13% in industrial, highlighting the rigour they implement on their valuations. However, one of the main areas of concern from industry analysts comes from the lack of disclosure around projected NOI growth, which can significantly affect valuations. (Blackstone, CoStar, Starwood, 2024)

Global REIT Performance (Aug 2022 v Mar 2024)

·US multifamily investment in Q1 2024 fell to lowest since the pandemic. According to CBRE, total investment volume fell to $19.8b, representing a substantial decline from the previous quarter (-28%) and peak in 2021 (-88%). Furthermore, investment volume over the past four quarters have reached the lowest level since 2014. The remaining bid-ask spread between buyers and sellers have been the main driving force behind this investment slow down. The rise in cap rates to 5.7% in Q1 2024 across US multifamily, comes in 100 basis points higher than the peak low of Q2 2022. (CBRE, CoStar, 2024)

US Multifamily Transaction Volume & Cap Rate

·Brookfield Asset Management with $106b of dry powder readying to invest. Brookfield finalised its first close of its flagship opportunistic real estate fund V with more than $8b. Brookfield had sold its 49% stake in ICD Brookfield Place, Dubai office, at one of the lowest cap rates in the region, freeing up liquidity. Brookfield is also prepping to sell its mixed-use IFC Seoul Complex as occupancy closes on full. Bruce Flatt, CEO of Brookfield Asset Management, sees opportunities in hotels, industrial, multifamily, and data complexes. He has voiced strong optimism around interest rates coming down and inflation being tamed, highlighting that we have already seen the bottom of the market and cap rates will start to come in. (Source: Brookfield, CoStar, 2024)

·NVIDIA acquires its HQ in Silicon Valley, California marking one of the region’s largest office deals since the pandemic. NVIDIA paid $374.3m for seven properties in Santa Clara, California totalling 626,200 sq ft. The properties have been occupied by NVIDIA since 1998 and has subsequently expanded since. Leasing momentum and transaction volume have reached the lowest in twenty years, primarily driven by the retrenchment of tech tenants. Reports indicate that NVIDIA does not have a back-to-the-office mandate for its employees but have recently completed development on a 1.2m sq ft office across from HQ and have secured development rights for an additional 2 m sq ft of office space in close proximity. This follows other industry players Apple and Meta who both also own their HQ campuses in California. (NVIDIA, CoStar, CBRE, 2024)

Europe

·Blackstone acquires £800m UK and US loan book from Deutsche Pfandbriefbank (PBB) for 6% discount to loan book value. The German lender’s loan book includes 11 assets evenly split between UK and US and represents 2.5% of PBB’s total real estate loan portfolio. Loan maturity is end of 2026 (excl. extension options). High quality assets that the loan book is secured against include the Berkeley and Connaught hotels (London, UK), BTR development (Manchester, UK), Travelodge Hotels (UK). The US loan book comprises major office properties such as 95 Morton Street (New York, US), 1700 Pennsylvania Avenue (Washington DC, US), and 325 Main Street, Kendall Square (Boston, US). 13.5% of PBB’s $4.5b US loan book is currently non-performing with 80% of the loans secured against offices with initial LTV underwritings below 53% on all loans. Around 8% of PBB’s €5.6b UK loan book is non-performing. (Source: CoStar, React, PBB, Blackstone, Conde Nast, 2024)

Connaught Hotel, Mayfair

(owned by Sheikh Hamad bin Jassim Al Thani of Qatar’s Constellation Hotels)

·75% of European CMBS have refinancing problems. 40% of all European commercial mortgage-backed securities (CMBS) have been categorised as having “high” or “very high” refinancing risks, according to Scope. Loans with “moderate” refinancing risk has now increased to 41%. Major transactions with looming refinancing risk includes the Squaire, Frankfurt office, which has recently been increased to “high”. Brookfield has recently extended past their fully-extended loan maturity on Citypoint, London office, whilst also looking to refinance CMBS on its UK retail warehouse portfolio and Aldgate Tower, London office.  It is understood that Brookfield has requested more time to seed together a solution. (Source: React, Scope, DBRS Morningstar, 2024)

·Meta, Facebook’s parent company, vacating London HQ in the West End and consolidating into King’s Cross campus. Meta had vacated its London HQ in Rathbone Square, West End, which had a lease running until 2032 with an annual rent of £17.8m in 2017. Cloud-based platform, Monday.com, is likely to fill the 272,443 sq ft of space vacated by Meta with other tenants looking to move into the remaining area. Meta had previously announced plans to consolidate its London presence at King’s Cross. This is in-line with Meta’s strategy to reduce its office footprint including exiting 700,000 sq ft of office space across London and Dublin. Last year, Meta paid landlord, British Land, £149m to break a lease on 1 Triton Square, which it never occupied. (Source: CoStar, Cushman & Wakefield, British Land, Meta, BAM, 2024)

Meta London HQ in King’s Cross

·Belgian sovereign wealth fund completes purchase of 21 office properties in Brussels from the European Commission. JV between SFPIM (Belgian sovereign wealth fund) and Ethias, insurer, acquired the Brussels properties with a €440m loan from consortium of lenders led by Dutch ING. The tenant, European Commission, will gradually vacate the buildings over the next seven years with current annual rent of €85m. The sale was driven by the European Commission’s implementation of the Green Deal, which includes reducing their holdings of number of buildings by 50% by 2030. The business plan is to upgrade 70% of the office footprint to meet energy efficiency standards, convert 25% to residential and the remaining 5% into local leisure and infrastructure. There is no guarantee that the European Commission will return to the offices once the renovation projects are carried out.   (Source: CoStar, Whitewood, European Commission, 2024)

·InterContinental Hotels Group (IHG) reports 2.6% increase in global revenue per available room (RevPAR) in Q1 2024, but Americas has taken a slight hit. RevPAR across US hotels decreased 1.9% in Q1 2024. EMEA showed an 8.9% Year-on-Year jump in RevPAR. IHG expects US hotel performance to pick up with its changes to the loyal program fee structure and increased reward night reimbursements. Americas hotel group bookings have already shown growth in April with Mexico driving the leisure hotel demand for IHG. Calendar events such as Easter and the Super Bowl tend to have a positive swing in the second quarter performance for the region. In April, IHG acquired 119 hotels (17,700 rooms) through a deal with Novum Hospitality with the geographic concentration around Germany. IHG have set their eyes on increasing its German footprint given Germany is traditionally not a branded/ franchised hotel market. (Hotel News Now, CoStar, IHG, 2024)