Wells Fargo Turns to U.K. as European Banks RetreatNeil Callanan and Dakin Campbell
Wells Fargo & Co., the lender that’s expanding its securities unit to challenge Wall Street competitors, is broadening U.K. commercial property lending as European banks are forced to retreat.
“Coming in now, when there is scarcity of capital, we can start to bank U.K. companies and have a very good chance of developing a long-term relationship,” Chip Fedalen, head of institutional and metro-markets at the bank’s commercial real-estate division, said in a telephone interview. “We want to be there forever.”
Wells Fargo Chief Executive Officer John Stumpf is looking beyond the U.S. after becoming the nation’s leading home-lender, biggest commercial-property servicer and owner of the largest retail-branch network. The bank is searching for revenue to extend three years of record profits amid weak loan demand and shrinking lending margins, and has purchased debt portfolios from European lenders exiting U.S. markets.
The San Francisco-based bank plans to increase its U.K. business as the amount of real-estate debt maturing in the country this year exceeds available funding by $25 billion, real-estate broker DTZ said in a November report. That funding gap is widening profit margins, attracting debt funds, insurers and other U.S. banks, including Bank of America Corp., who can charge borrowers higher interest rates. It may also help revive the region’s commercial mortgage-backed securities market that’s been largely frozen since 2008.
Wells Fargo was in a group including Bank of America and Royal Bank of Canada that agreed to provide 400 million pounds ($619 million) of five-year senior debt to Maybourne Hotels Group in December. The London-based company, which owns luxury hotels including Claridge’s and The Connaught, also obtained a 147 million pound mezzanine loan from New York-based Blackstone Group LP, RBC and Starwood European Real Estate Finance.
“This level of commitment had not been seen for some time,” Robin Priest, managing director of Alvarez & Marsal’s real estate advisory services division, which advised Maybourne, said in an e-mail. “In my long career, this is about the best time to be writing debt for real estate: the risk-reward today is extremely attractive.”
Banks from the U.S. can charge borrowers as much as 100 basis points, or 1 percentage point, more for a loan in the U.K. compared with a domestic loan secured by a similar quality property because of the lack of available debt for real-estate lending, according to a person with knowledge of the firms’ plans. He asked not to be named as he wasn’t authorized to speak on their behalf.
U.S. lenders are replacing British, German, French and Spanish banks, which are focused on selling portfolios of non-performing loans advanced before the debt crisis, Wells Fargo’s Fedalen said.
Commerzbank AG, Germany’s second-biggest lender, is shuttering its Eurohypo unit. The bank had cut the size of its real estate finance assets by 17.3 percent to 41 billion euros ($54.7 billion) in Germany in 2011 and outside the country by 13.5 percent to 40.3 billion euros, according to its annual report. Dutch lender SNS Reaal NV is selling its entire 8 billion-euro commercial real estate loan portfolio and Irish Bank Resolution Corp. has been liquidated by the government and its assets will be sold to the country’s National Asset Management Agency.
“2013 will come to be seen as the time when the window on European opportunistic investment was well and truly flung open,” JP Morgan Asset Management wrote in a report released Feb. 12. “Just as 2009 proved to be a wonderful period to buy ‘core’ assets, so 2013 will be the equivalent for the opportunistic segment of the market.”
Almost everything bought by Blackstone in Europe last year was purchased from a European bank, Jonathan Gray the private-equity firm’s global head of real estate said Jan. 13 at a Credit Suisse Group AG financial services forum in Miami.
“We’re actually buying some things from Spanish banks,” he said. “We bought some things from Italian banks. The Irish have been going at it, in earnest. And credit to them, I think they’re going to come out of the crisis first, as a result. The British banks will be selling more and have begun to sell.”
Wells Fargo, which announced plans to expand its British office in January, transferred three senior executives to lead the effort. Mike Marino, a 24-year Wells Fargo veteran who led the bank’s southern California market, was scheduled to move this month, while Robert Maddox and Cullen Powell will also join him, according to a Jan. 17 statement. They’ll lead client development, underwriting and loan production teams.
The bank has already provided credit to U.K. office buildings, industrial properties, multifamily housing projects and hotels, Fedalen said. He declined to estimate how much the bank plans to lend. Rob Martin, research director at Legal & General Property Ltd. said in a presentation that the amount could be as much as one billion pounds this year.
“Some of their traditional competitors are out of the market for five to 10 years probably,” said Martin. “From a competitive perspective it looks very good for them.”
The arrival of U.S. banks may help thaw Europe’s frozen commercial mortgage-backed securities market as banks seek to spread risk.
“There’s a lot of capital coming in from the U.S., and it’s the U.S. banks that are really talking the biggest talk about bringing CMBS back to Europe,” Charles Roberts, a finance partner at law firm Paul Hastings LLP, said in an interview.
The amount of the securities originated in Europe this year will rise to more than 10 billion euros this year from 2 billion euros last year, Roberts estimated. While Wells Fargo is holding all its European loans on the balance sheet, a CMBS platform may come later, Fedalen said.
One constraint on CMBS will be that lenders, sponsors and originators are required by regulators to keep 5 percent of the bond after it is sold if they are selling it to European-based credit institutions.
“That’s going to be a problem for the U.S. banks that are coming over here to originate and securitize,” said Roberts, whose clients include JPMorgan Chase & Co. and Hatfield Philips, the European loan servicer recently bought by Starwood Property Trust Inc. “That’s going to hamper how much room they have, or how much appetite they have, to do that.”
U.S. bank growth in Europe may also change the lending strategies of the continent’s pension funds and insurers. A return of cheap senior lending may prompt them to increase the amount of risk they take, Isabelle Scemama, Axa Real Estate’s head of commercial property finance, said by telephone. “In this environment we consider selectively higher risk profile offering higher returns.”
Wells Fargo had about $30.2 billion in European lending commitments, security holdings and derivatives at the end of September, up from $28.7 billion at the end of 2011, according to securities filings. About $14.5 billion of that was in the U.K., with another $3.3 billion in the Netherlands, the filing showed. Foreign loans accounted for about 5 percent of the lender’s loan portfolio at the end of September.
Wells Fargo currently has no plans to expand commercial real estate lending in continental Europe, including Germany, as the bank is still stuck with a portfolio of loans from that country assumed in its 2008 purchase of Wachovia Corp., Fedalen said. As part of his duties, Maddox will oversee liquidating the portfolio in Germany.
Wells Fargo “put our toe in the water” in late 2011 by lending on properties confined to London’s central business district, and initially lent against properties that were 93 percent leased or more with stable cash flow from tenants, Fedalen said.
Now that it understands the market better, it’s willing to lend outside London and fund “projects that need some repositioning” such as a new tenant or renovation, he said. The effort to “significantly expand” means U.K. lending will be a “material and significant piece of our business in the future,” he said.