This week, COVID restrictions in the UK have loosened once again, with the UK taking the next step in its “roadmap” out of lockdown. In England, hairdressers, gyms, non-essential retail, and outdoor dining are now open. In Wales, non-essential shops can now open and travel is allowed from England, but the re-opening date for outdoor dining has not yet been announced. Northern Ireland will be reviewing lockdown restrictions this week, and in Scotland, rules remain the same after their most recent update on April 5th.
These lifts will impact the commercial real estate (CRE) space in the UK with the slow return to normalcy. Likewise, on April 6th, the government announced a call for evidence for its commercial rent regulations.
Commercial Rents and COVID-19 Call for Evidence
On April 6th, the UK government updated some of its regulations surrounding CRE spaces. At the start of the pandemic, in response to the closure of countless businesses, the government introduced legislation that made it impossible for landlords of commercial properties to evict tenants for not paying rent. Full details of the regulations can be found here. These measures are in place until June 30th, 2021.
Now, the government has announced a “call for evidence,” which states that “if there is evidence that productive discussions between landlords and tenants are not taking place, and that this represents a substantial and ongoing threat to jobs and livelihoods, the Government will not hesitate to intervene further.”
These measures are being introduced as a way for the government to gradually lift the regulations while still helping those businesses that are struggling.
Investment Volumes in London
According to Savills, total investment volume in the City of London at of the end of Q1 2021 was approximately £626 million. These levels are around 50% down, compared to Q1 2020, and 65% down on the five-year average. UK investors have accounted for 47% of the transaction volumes, followed by European and Asian investors at 18% each.
Activity has been almost entirely focused on pre-existing stock, essentially due to the increased demand for income-generating assets and a flight-to-quality sentiment. There is, however, optimism that market activity can resume over the next months to levels more in line with previous years. The article hints that there are almost £2 billion currently under offer in the City across 16 transactions.
The renewed market interest is palpable all across Europe, too, as we have seen in several of our most recent European Market Updates. Most recently, Axa Investment Managers, one of the world’s largest asset managers, has raised €799 million to develop offices in Europe, with a focus on the UK, Germany and France, according to the Financial Times. The bulk of the investment will finance offices in major cities, with the remainder going towards residential development.
The consensus is emerging toward a polarization in major European cities, with office rents falling in older workplaces, unlike newer developments. Also, modern, high-end offices will remain attractive.
Against this backdrop, London is still very attractive compared to other locations, also thanks to the success of the vaccine rollout. In fact, according to CBRE, £45 billion of capital is targeting the London office market.
A Slow Start to the Month for European CLOs
The European CLO market has witnessed a quiet start to the month after a very robust first quarter, with only a couple of refinancing’s and no new deals issued. This is likely a result of the holiday weekend seen at the start of April, as the overall sentiment for European CLOs remains very positive. The pipeline for European CLOs reportedly includes 1 refinancing, 5 resets, and 2 new issue deals.
Worth mentioning, however, is the partial refinancing of Oak Hill European VII, with the pricing of AAA and double AA notes conducted in two batches over seven days, an unusual occurrence.
Manager Flexibility in CLOs
We have mentioned previously that indentures are increasingly including language aimed at giving flexibility to asset managers to participate in new financing of borrowers in default or distress, as shown in the recent reset of Newhaven CLO.
The CLO manager may buy loss mitigation obligations in order to improve the recovery value of an existing investment.
However, such instruments typically do not receive credit in the principal balance definition unless some conditions are met: in those cases, any distributions received are treated as principal account proceeds. Also, in Newhaven CLO, the cumulative exposure to loss mitigation obligations is capped at 10%.
CMBS Surveillance: Recent European Special Notices
- 9/Apr/2021 Deal Name: ELIZABETH FINANCE 2018
- Special Notice: On 10/Feb/2021, the Class D Noteholders appointed Solo & Partners Limited as the Operating Advisor; the Issuer sent a notice on 24/Mar/2021 to SS that the Operating Advisor has requested that the appointment of CBRE as SS is terminated and that a replacement SS is appointed, in relation to the Maroon Loan; the Issuer expects that all of the documentary conditions of the Servicing Agreement will be met and the date of the proposed SS Transfer needs to be agreed and confirmed between the outgoing SS and the Replacement SS.
- 9/Apr/2021 Deal Name: INTULN
Special Notice: On 8 April 2021, the Borrower notified Obligor Security Trustee that an Obligor Event of Default and, thus a Default and a Trigger Event, occurred when the Borrower failed to remedy its non-payment of certain sums to the Debt Service Account on or before the Trap Date falling on 1/Mar/2021; the Event of Default was forborne as part of a Noteholder consent solicitation process, documented in a first supplemental master amendment deed dated 29/Dec/2020 entered into by, among others, the Issuer, the Borrower and the Obligor Security Trustee, the Termination Date of which was recently extended as part of a further Noteholder consent solicitation process, the results of which were notified to the Borrower on 29/Mar/2021 and documented in a second supplemental master amendment deed dated 29/Mar/2021 between those same parties.
- Andrea Tortora
Compliments of Trepp, LLC – a member of the EACCNY.