Haberdashers Hall, London 21st May 2014

Please be aware that these training notes contain general information relating to issues affecting LPA Receivership law and practice only and do not constitute legal advice. For any specific issues you are recommended to consult a solicitor or other appropriate professional adviser .

Please be aware that these training notes contain general information relating to issues affecting LPA Receivership law and practice only and do not constitute legal advice. For any specific issues you are recommended to consult a solicitor or other appropriate professional adviser .

Paul Batho NARA Chief Executive

Recovery and Evolution

Recovery  Impact on NARA and the work of receivers  Bad news?

Evolution  …of the role of property receivers  …of NARA

The Recovery

Since May 2013  Recovery of the market  Confidence returns  Investors, lenders, occupiers active  A genuine recovery?

 Economic basis, interest rates  A new market or the next boom/bust?

The Recovery – implications for recovery specialists

 Receivership appointments – slowing demand reported  A recovery-based mini-boom?

 Impact of rising interest rates?

 A new market  New lending  New approaches  Timing?

NARA – 2013/4 developments

 Growing RPR membership (23 in 2014)  New Council structure  Improved web site  Financial position  Exams, regulation and the JRC  Membership numbers

NARA – Evolution

The number of appointments will decline but……..

NARA – Evolution

Policies for 2014/5  Promote and supporting receivers  To lenders  To opportunity funds  To government and other institutions   Work with Association of Property Lenders A receiver’s skills – relevance to the new lending market  Continuing relevance of RPR members  Encouraging Associate and Affiliate membership

NARA - Future

NARA  Membership expertise in property and finance  Focussed Council structure  Well funded The skills and ingredients to serve a changing market

Peter Bill

Evening Standard Columnist www.planet-property.net

Please be aware that these training notes contain general information relating to issues affecting LPA Receivership law and practice only and do not constitute legal advice. For any specific issues you are recommended to consult a solicitor or other appropriate professional adviser .

“ A cracking good read”

- David Sleath, Segro chief executive

“Sycophantically arse-licking”

- Mr. Waterstone, anonymous bastard

WWW.PLANET-PROPERTY.NET

LESSONS FROM BOOK-LEARNING

• Beware of linked equity & debt deals • Beware of tall dark strangers • Beware of bright young things

WHERE ARE WE NOW?

• • Starting from June 2007 Capital growth stands at two-thirds of peak values Rental values are stuck at 91% of June 2007 figures • • Starting from June 2009 Capital growth is up 20% Rents remain four percent below pit levels

BANG

Dear God, just let there be one more property boom. I promise I won’t piss it all away this time

Harvey Soning, property veteran

BOOM

Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria

Sir John Templeton

MONEY, MONEY, MONEY

A billion here, a billion there, and pretty soon you’re talking about real money

Everett Dirksen

HOW MUCH MONEY COSTS

FINANCE COST FOR PURCHASING PRIME OFFICE PROPERTY

THE FIRST SIGN OF THE JITTERS

LOAN TO VALUE RATIOS FOR PRIME OFFICE PROPERTY

PLANET PROPERTY

Inside every working anarchy, there’s an old boy network

Mitchell Kapor

DEVELOPERS’S WORLD

People who enjoy meetings should not be in charge of anything

Thomas Sowell

WHEN DEBT MATCHED NET ASSETS

Land Securities, British Land and Hammerson Combined assets and debt

BIG THINKERS

You have to think anyway, so why not think big?

Donald Trump

AGENTS

The propensity to truck, barter and exchange one thing for another is common to all men, and to be found in no other race of animals

- Adam Smith

AUCTIONS

Large groups of people are smarter than a few experts

James Surowiecki, author of “The Wisdom of Crowds”

AFTERMATH

Experience is the one thing you can’t get for nothing

- Oscar Wilde

HERE WE GO AGAIN?

“The reality is that a new generation comes along very quickly with lots of ideas. Then we get back into the same cycle once again.

”

Ian Coull, former chief executive, Segro

BUT WHEN, HOW, WHERE...

John Muldoon, MRICS Hatfield Philips International Please be aware that these training notes contain general information relating to issues affecting LPA Receivership law and practice only and do not constitute legal advice. For any specific issues you are recommended to consult a solicitor or other appropriate professional adviser .

Recovery and Evolution



Loan servicing and CMBS



The Role of the Special Servicer



Evolving Real Estate Debt Market



The “Light Touch” Approach to RE Workouts



Non-Performing Loans Sales – A New Client Base?

Hatfield Philips – Loan Servicing & CMBS

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Hatfield Philips International (“HPI”) is Europe’s longest serving commercial real estate loan Servicer, having managed over €61 billion of assets since its inception

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With a staff of over 120 based in London and Frankfurt, HPI has active workout exposure in 16 European jurisdictions and has worked out over €5 billion of distressed debt

•

HPI Active Servicing Portfolio

Belgium Denmark Finland Republic France Austria Germany →

HPI is owned by Starwood Property Trust, which is the largest mortgage REIT in the U.S. with a market capitalization of $4.8 billion (NYSE: STWD)

UK →

Active servicing portfolio consists of 3,000 properties (286 loans) totalling AUM of €19 billion

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HPI is the largest Special Servicer in Europe

The Netherlands Switzerland Sweden Spain Norway Poland Italy Luxembourg Special Servicer

Hatfield Philips

Capita Morgan Stanley Mount Street Solutus CBRE LS Hudson Situs Active Special Servicing - European CMBS Market (1 ) Market % by Loan Balance * Market % by Loan

Hatfield Philips 83

Capita Morgan Stanley Mount Street Solutus 40 12 7 10 CBRE LS Hudson Situs 3 8 5 Market % by Balance

36%

18% 6% 1% 3% 26% 5% 3% 2%

(1) Moody’s EMEA Servicing Report January 2014 /

*Securitised loan balance is in

€ MM as per transfer date Data as of 31 December 2013

The Role of the Special Servicer Evaluating the options to maximise returns Option 1 LOAN CORRECTION Option 2 LOAN MODIFICATION Modify Loan New Sponsor Market Property w/Financing Option 3 LOAN SALE DPO Option 3a Borrower Led Sale Option 4 ENFORCE Share Pledge Fixed and Floating Charges Primary Servicer Sale of Stabilised Property Asset Management Quick Sales Apply Funds through Waterfall Take Control

Evolving Real Estate Debt Market



The peak years for European CMBS issuance were 2006 & 2007 which saw €60bn and €45bn originated respectively. Post the collapse of Lehman's in 2008 origination virtually ceased. (Source: Commercial Mortgage Alert – May 2011)



Estimates for 2014 CMBS Issuance vary but point towards a range between €7bn -15bn of new originations in 2014 (Source: James Wallace, Costar, 12th December 2013)



New sources of finance have emerged to fill the void left by the reduced CMBS issuance and the continuing absence of many bank/balance sheet lenders:

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Private Equity

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Debt Funds

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Listed Debt Vehicles

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Insurance Companies

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Mezzanine Lenders

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Corporate Bonds



Despite the slow recovery of the CMBS Market and many banks still focusing on deleveraging their books, liquidity is returning and there is increasing Real Estate debt available.



To illustrate this, HPI have boarded 177 loans totalling €4.1 billion for six new clients within the last 18 months

The “Light Touch” Approach to RE Workouts



Collegiate approach verses One Stop Shop instruction

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A continual and active line of communication between Special Servicer and Fixed Charge Receiver/Administrator



Multi-disciplinary teams from different practices and service providers

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Asset Management placed at the centre of workout process

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Robust Business Plans – regularly reviewed

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Hold, Asset Manage then sell verses sell now - Capex requirements/Capex availability?

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Market driven exit strategies

Non-Performing Loans Sales – A New Client Base?



Since 2011, HPI have underwritten NPL Projects with a UPB of circa €34.1bn



Cushman & Wakefield research suggests that European loan sales will exceed the €40bn mark in 2014 – a 32% increase on the 2013 level.

(source: C & W, 05.02.2014)



Active PE buyers include Apollo, Blackstone, Cerberus, Colony Capital, Deutsche Bank, Kennedy Wilson, Lone Star, Marathon and Oaktree....and there are new entrants still looking to join upcoming bid processes.



PE buyers typically adopt a hands on approach and understand the loan and real estate metrics.



Cost of capital and NPV analysis drive their workout strategies – speed of execution is key.

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PE NPL buyers have more flexibility than the vendor banks - Strategies range from DPO’s, Enforcement to Loan to Own

In Summary



The markets for debt and workout services are evolving as the economic recovery gains pace:

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Liquidity has returned to real estate markets from new sources

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There are potentially new clients for workout specialists

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A dynamic client base will require advisors to adopt greater degrees of flexibility

David Marks

Co-Managing Partner, Brockton Capital LLP and President, British Property Federation Please be aware that these training notes contain general information relating to issues affecting LPA Receivership law and practice only and do not constitute legal advice. For any specific issues you are recommended to consult a solicitor or other appropriate professional adviser .

CONFIDENTIAL, PROPRIETARY AND TRADE SECRET TABLE OF CONTENTS 1. Market Conditions: 2005 – 2008 2. Market Conditions: 2009 – 2014 3. What happens when the ‘sardine cans’ are opened up? (Sam Zell’s dictum) 4. UK Outstanding Property Debt, 2014

40

• 1.

Market Conditions: 2005 – 2008 The leverage in the system was akin to cocaine; Lehman bought it to an abrupt end .

CONFIDENTIAL, PROPRIETARY AND TRADE SECRET

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CONFIDENTIAL, PROPRIETARY AND TRADE SECRET • 2. Market Conditions: 2009 – 2014 QE, six years of ZIRP, Help to Buy, is akin to heroin. But policy makers don’t want an abrupt end, more a gradual come down via tapering, signaling and gradual rate rises .

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3. What happens when the ‘sardine cans’ are opened up? (Sam Zell’s dictum) CONFIDENTIAL, PROPRIETARY AND TRADE SECRET • After 12 months of ‘inadvertent ownership’, nothing much changes.

After 7 - 8 years, leases are expiring, M + E is shot, obsolescence has kicked in and the capex has been deferred. And deferred again. And the sardines begin to stink.

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CONFIDENTIAL, PROPRIETARY AND TRADE SECRET 4. UK OUTSTANDING PROPERTY DEBT, 2014 The banks: perhaps halfway through their bad books?

DTZ estimate there is around £541 billion of UK commercial real estate in total invested stock, resulting in around 60% LTV leverage overall. (“Overall” is key. Some investors are all equity. Some are 100%+ LTV.) Total (2013) UK Property Debt (1) The UK CRE debt market is (still) highly concentrated.

The four elephants in the room (still) comprise (1) :

The size of each circle represents its portion of the total UK CRE loans outstanding (2013)

LENDER ESTIMATED 2013 UK LOAN BOOK % OF OVERALL UK MARKET RBS (2) LBG (3)

C.£30BN C.£27BN 9% 8%

CORPORATE PROPERTY AND COVERED BONDS

C.£39BN

NAMA (4)

C.£7BN 2%

CMBS

(GENERALLY) (5) C.£35BN 11%

TOTAL

C.£99BN 30% The legacy problems are being resolved —the equivalent figure was c.£172 billion last year, a reduction of c.42% through a combination of repayment, amortisation, loan sales, asset sales, and write-downs. But what is left and what is the clearing price for these remaining assets that have not yet been worked out?

TOTAL UK PROPERTY DEBT 2013

C.£325BN (1)

NAMA

C.£7B N

TOTAL UK CMBS OUTSTANDING

C.£35BN

RBS LOAN BOOK

C.£30BN

LBG LOAN BOOK

C.£27BN (1) Source : Brockton Capital estimates using multiple sources inc. DTZ ‘Money Into Property’, De Montfort University research, Savills Debt Market Research, and company annual reports (2) RBS Annual Results, 2013 (3) The UK Loan Book for LBG is for financial year ending 2013 (4) NAMA Annual Report 2012 (5) De-Montfort University Commercial Property Lending Market Report: Mid-Year 2013

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Daniel Van Gelder

Co-founder Exemplar Chairman, the Westminster Property Association

A few key messages

 not enough construction activity to satisfy demand  offices still under attack from residential  occupier demand increases  construction costs going up  market risk abounds, but likely to sustain

West End Take Up 1,0 0,8 0,6 0,4 0,2 0,0 1,8 1,6 1,4 1,2 Secondhand New Completed 10-year average: 1.0m sq ft Pre-let Source: CBRE

2004

4.4

2005

4.4

2006

4.7

2007

4.9

2008

3.6

2009

3.1

Annual Take-up (million sq ft)

2010

4.7

2011

4.3

2012

3.5

2013

4.0

West End speculative developments, >50,000 sq ft ‘000 sf 350 300 2014: 0.4m sq ft 250 200 150 100 50 0 2015: 0.7m sq ft 2016: 1.9m sq ft 2017: 1.0m sq ft 2018: 1.1m sq ft Totals reflect schemes in chart Source: CBRE

Offices to Residential

Occupiers arriving in Central London

Commuters coming in to Central London

Pressures on Construction Costs

Construction Cost Inflation

thinking about risks:

 political risks – mayoral & general elections 2015  economic risks – interest rates etc  global risks – London compared to other locations  building specific risks – obsolesence

A few key messages

 not enough construction activity to satisfy demand  offices still under attack from residential  occupier demand increases  construction costs going up  market risk abounds, but likely to sustain

Daniel Van Gelder

Co-founder Exemplar Chairman, the Westminster Property Association