Property market | What does it mean if a large property-secured loan is unpaid? This is how the expert evaluates the Sponda news

News agency Bloomberg told on Thursday, that the US investment giant Blackstone had failed to pay back the loan originally amounting to 591 million euros. From a Finnish point of view, the situation was made interesting by the fact that the loan is secured by commercial properties owned by the Finnish company Sponda.

Sponda owns many of the most well-known commercial properties in the center of Helsinki, such as the shopping centers of Forum and Citycenter, known as Makkaratalo.

The news raised a lot of questions. Is the whole Sponda going upside down? Will the forced sale of central Helsinki begin? Is the real estate bubble bursting now?

Sponda is a large Finnish real estate investment company whose roots are in the banking crisis of the 1990s. The company took over the real estate assets of the bankrupt Skop bank. The state listed Sponda on the stock exchange in 1998.

In 2017, Blackstone bought all of Sponda for EUR 1.8 billion.

Sponda comment on the news very little, and that too by email. According to the message, the loan is not secured by real estate in the core of Helsinki. The company is also told that tenants do not need to worry, the leases will continue unchanged and the property bills will be paid.

“This arrangement only applies to a small part of Sponda’s real estate portfolio. Our core portfolio consists of high-quality properties located in the best locations in Finland’s largest cities,” Sponda says in his statement to HS.

So what is it all about?

HS got hold of the investor prospectus of the Frosn 2018 DAC loan instrument from 2017.

It is a real estate-backed bond, or CMBS, and its issuer is Sponda. The secured loan has therefore been converted into securities, which have been sold to investors. According to the prospectus, the loan is originally related to the financing of Blackstone’s purchase of Sponda.

The loan matured in February of this year. According to Bloomberg, it could not be refinanced, and the collateral properties could not be sold in time, so Sponda left the rest of the loan unpaid.

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According to Sponda, the arrangement concerns “only a small part of Sponda’s real estate portfolio”.

A loan is arranged in a complex pattern to a special mission company registered in Ireland. Therefore, the failure to repay would not seem to directly affect Sponda.

According to the loan prospectus, it was originally secured by 63 office and retail properties, including Prisma in Itäkeskus, the headquarters of consulting company Sweco in Ilmala and large office buildings on Porkkalankatu. So not quite the core of Helsinki, but close nonetheless.

During the loan period, part of the real estate has been sold and a corresponding part of the loan has been repaid. When asked, Sponda says that, for example, all the properties mentioned above have already been sold years ago.

So Sponda bundled the part of its real estate portfolio that it was getting rid of. The last benefit was extracted from the portfolio by using it as collateral for low-cost financing.

With the corona epidemic, however, the market situation for commercial real estate deteriorated.

In December according to the credit rating agency Fitch’s report, there were 297 million euros left in the loan and 45 million in secured properties. Fitch lowered the loan’s credit rating because it considered the market situation difficult to realize the secured property and also to renegotiate the loan.

According to Fitch, more than 45 percent of the remaining properties were empty in December, while 30 percent of the premises were empty at the time the loan was sold. At the time, the loan was sold at a fairly moderate interest rate, even though Blackstone stated in its own inspections even then that the properties were of “average or below average” quality as investment targets.

At the time of zero interest rates, every moderately profitable investment with a reasonable risk went on sale.

The size of the sold loan was 67 percent in relation to the real estate’s market value at the time. In other words, the value of real estate can decrease by 33 percent, and the lender would still get theirs back in the realization of collateral.

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Sponda bundled the part of its real estate portfolio that it was getting rid of.

CMBS i.e. a securitized real estate secured loan is a typical way for international real estate investment companies to leverage their real estate holdings. For investors, such loan instruments, on the other hand, offer a way to invest in real estate without owning it directly.

The investment professionals interviewed by HS do not consider it likely that real estate as collateral would be forcibly sold, even if the repayment of the loan has been neglected. It is more likely that the financing will be reorganized at the end of the negotiations and that real estate sales will return in better times.

Real estate sector CEO of KTI, which is focused on analysis Hanna Kaleva estimates that the news tells about a change in the real estate market situation.

“I don’t know this case in detail, but the rise in interest rates affects the real estate market in many ways now. Financing is getting tighter, the price of financing is going up and the yield requirements for real estate investments are going to rise again,” says Kaleva.

It, in turn, affects the value of real estate. According to Kaleva, a year ago investors’ return requirements for real estate investments were at their lowest, only 3–3.5 percent. Reference rates were still negative.

It means that when the interest rates are already five percent with the bank’s margin, the effect of the debt leverage becomes negative. In such destinations, prices will inevitably drop rapidly.

Kaleva is not surprised by the difficulties in selling the real estate secured by Sponda’s loan.

“The market situation is completely different from what it was a couple of years ago. I still don’t believe in forced realizations in this situation. They didn’t come even after the financial crisis. It would not be in the interest of any party,” says Kaleva.

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“The rise in interest rates now affects the real estate market in many ways.”

A couple during the last decade, large real estate deals made by foreign investors have been reported in Finland. Is all of Finland’s real estate assets now collateral and pawns for such loan instruments arranged in tax havens?

“Absolutely not. We have calculated that professionally managed real estate investment assets are around 97 billion euros. Of that, 18 billion are in the care of Finnish pension companies and a lot of investments financed with ordinary bank loans,” says Kaleva.

About one third of the investments are held by international investors. According to Kaleva, it is difficult to know everything about the financial arrangements related to them.

“There, too, a large part is pension company-type investing with moderate debt leverage. At the other extreme are these arrangements of large asset management houses.”

For example, according to Kaleva, the debt leverage in real estate investment funds aimed at domestic consumers is significantly lower than the 67 percent used in the case of Sponda’s loan.

“The lending rate in these funds is around 30 percent. In general, in recent years, banks have granted loans for real estate investments at a maximum of about 60 percent in relation to the value of the real estate,” he says.

Correction 3.3. at 10:18 p.m.: Removed information that the special mission company registered in Ireland would be a subsidiary of Sponda.