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Lenders wary of financing office assets fully leased to WeWork, flex operators

Office buildings that are fully leased to flexible workspace operators such as WeWork Cos. Inc. present a risk that many lenders who finance real estate developments and acquisitions will be unwilling to take, according to two large debt players in the European property market.

Speaking at a real estate conference in London, Francois Trausch, CEO of Allianz Real Estate, said that while loans for assets fully leased to flex operators could work in some circumstances, lending decisions based on cash flow are "a different matter." Allianz Real Estate, the property investment arm of German insurance giant Allianz Group, originates about €4 billion of real estate loans annually and has a lending book of €20 billion, with investments mainly in Europe and the U.S., Trausch said.

Attitudes within the real estate industry toward the recent rapid growth of the flexible workspace sector vary, and many landlords and lenders are skeptical about the long-term viability of WeWork and its rivals' business model. Several major lenders have expressed reluctance to finance assets that have a large portion of their space leased to flex operators, according to a March report from Bloomberg.

"If you are a purely cash flow-driven lender, whereby for example you will only lend to assets where the lease terminates after your loan has been repaid, then your mindset is a little bit constrained," said Trausch, adding that this lending model is one used by Allianz.

Lenders adopting a "loan-to-own" strategy where creditors take possession of an asset in the event of default are in a much better position to finance office buildings fully leased to flex operators, said Trausch. "If you have a loan-to-own strategy, you shouldn't mind [lending to finance assets fully leased to a flex operator] if you like the assets," he said.

Still, loan-to-own lenders should consider the ongoing uncertainty within the real estate valuation industry regarding assets with a large portion of their space leased to flex operators, Trausch added. "What's the valuation of an asset when it's 100% leased to a flex operator? This can have an impact that you should take into account when you calculate your loan-to-value," he said.

The leasing of entire office buildings by flex operators has become more common in recent years, particularly by WeWork. A total of 14 such buildings have been traded in the U.K. in the last three years, according to data from real estate services firm CBRE. These deals suggest that assets that are 100% occupied by flex operators trade at a discounted yield of between 35 and 50 basis points, the data showed. Assets that are more than 50% occupied by flex operators trade at an average discounted yield of 25 basis points, CBRE found.

Belinda Chain, head of asset financing at Europa Capital, which is majority-owned by Mitsubishi Estate Co. Ltd., said that her company has let space to flex operators in several of the office assets it owns in the U.K., but it prefers not to "fill a building with it." Europa Capital, a real estate investment manager focused on the European markets, has invested more than €11.3 billion across 20 European countries since its formation in 1995, according to its website.

"We definitely really interrogate the concept of how much we lease to a [flex operator] when we consider investments," Chain said. "Because we can take a view on [what is a safe level of leasing to a flex operator], but whoever is going to buy the building from us is also going to take a view on it, so if we ignore that, we're at risk."

Lenders should avoid adopting a blanket policy on flex-leased assets across different geographies, Chain added, citing Munich's low office vacancy rates of 2% to 3% as an example of a market where lending to such assets would be less risky. "It's a question of how much and where," said Chain. "It's really market-contingent."