GE Capital exits European direct property in favour of UK and French senior debt lending

By James Wallace - Tuesday, August 28, 2012 15:44

GE Capital Real Estate, a subsidiary of General Electric, has withdrawn from European direct property market and is accelerating plans to become a major senior debt lender in the UK and France, driven by an edict from the global conglomerate’s US head office, CoStar News can reveal.

The medium-term strategic re-focus was set out by GE Corporate in a detailed plan to all European offices around three weeks ago, underlining and accelerating long-trailed plans to re-enter the property lending market and rebalancing the UK business in line with the global lending-focused real estate operation.

Initially, GE Capital’s lending will be senior debt only in UK and France but further major Western European countries are and debt products – thought to include mezzanine lending – are under consideration.

The scale of GE Capital is expected to be deal-driven but significant, with pricing on a deal by deal basis with a floor margin price of at least 400 basis points, driven by market dynamics as well as GE Capital’s own cost of capital.

GE Capital will offer senior debt against UK prime and secondary property as well as loan-on-loan financing, with borrowers focussed on active asset management plans to increase real estate rental and capital values.

While GE Capital’s re-entrance into UK property lending has long been anticipated, it was not envisaged that this would strategy would be dove-tailed by the withdrawal direct property investments. The suspension of new European direct property investments reflects GE’s global house view as the relative value of real estate equity versus debt.

GE Capital Real Estate will look to complete an orderly managing out of its direct $12.3bn European real estate portfolio with piecemeal sales following the completion of asset management strategies.

GE grew its direct European real estate business from 1997, having arrived in London in 1986. Today it comprises more than 50m sq ft in offices retail and warehouse assets, multifamily, hotels and development projects in the UK, France, Germany, Italy, Spain, the Nordic countries and in central & Eastern Europe. GE Capital has 66 joint venture partnerships.

Early last year, GE Capital proposed a business plan to re-start property lending after a more than a decade hiatus to take advantage of banks' retreat. The proposals were approved by the parent business ahead of its first real estate debt deal in 12 years last August;  a syndicated position in the £305m Deutsche Bank senior loan financing Blackstone’s acquisition of the eight-strong Mint hotels portfolio from City Inn. The deal was dubbed Project Coralia.

Two months ago, GE Capital closed only its second UK real estate loan since 1999, providing acquisition finance to Angelo Gordon, the US fund, for the purchase of Senator House at 85 Queen Victoria. The senior loan was fully underwritten by the UK GE Capital Real Estate business.

CoStar News understands that GE Capital also provided a loan-on-loan financing term sheet to support Cerberus Capital Management’s bid for the Lloyds Banking Group’s £625m Project Harrogate UK loan portfolio, for which OakTree Investment Management has been selected as the preferred bidder.

GE Capital built a European loan portfolio during the global financial crisis, buying portfolios from Bradford & Bingley, Capmark and Credit Suisse as these institutions were exiting their exposures to raise capital.

In November 2007, GE Capital paid £2.2bn for a portfolio of Bradford & Bingley UK commercial property loans, then in April 2008 GE Capital paid $896m for a 34-strong European loan portfolio and $910m for five large European loans.

GE Capital acquired its third European loan portfolio in eight months – in June 2008 – paying €642m to Credit Suisse for a pool of highly-leveraged European property loans.

To manage these three pools, GE Capital built a team of real estate lending specialists, now under the management of James Spencer-Jones, head of debt asset management, who joined in May 2009.

The three property loan pools, following maturities, repayments, restructuring and enforcement action are now worth $3.7bn, compared with the UK business $1.4bn in direct property investments.

Lennart Sten is the president of GE Capital Real Estate Europe and Ilaria del Beato is the UK managing director of GE Capital Real Estate.

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