Anne-Laure is based in Paris and is a partner at law firm Nixon Peabody,a Global 100 law firm and recognized as one of the largest in the world. With 18 years of experience, Anne-Laure's practice includes real estate, corporate real estate, and real estate finance: including leisure and hotel deals, portfolio transactions, commercial leasing, and asset management. She has helped facilitate a number of large real estate and real estate finance transactions. Anne-Laure also has extensive experience in dealing with Middle Eastern clients.
Dorothée Queyroux: Voltaire has the ability to structure transactions in France. The availability of French bank financing is very restricted and much more conservative than in the UK. How do you perceive lending appetite for investment and development funding requirements and what type of transactions have you been acting on recently?
Anne-Laure Fonade: Most of the banks which dominate property lending are pulling back after incurring losses in the financial crisis. France was not an exception and many French institutions have forced the borrowers to find new funds or to look for other solutions for refinancing. Our team has worked on a few refinancing transactions, and the financing of new assets for investors who already had significant portfolios. It is true that French bank financing is much more conservative, but it has helped them to be now better placed in the post-credit crunch environment. While the mortgage market may be historically less developed in France than those in the UK, the USA or Australia, desirable features such as 100% mortgages, interest only loans and equity release are all currently available in France, where the market has recovered comparatively quickly with regards to the flexibility and variety of products on offer.
Full term fixed-rate mortgages are very popular in the French domestic market, and there is a good range of these products available to non-residents. The lenders also cater for those who prefer variable rates, with mortgages that are revised every 3 months, or 1, 2, 5 or 10 years.
Interest only mortgages are available, although they are less common than repayment options. Generally there will be an interest only period for between 2 and 10 years (depending on the mortgage term) before the mortgage reverts to a normal 'capital and interest' repayment mortgage. Some lenders do offer interest only mortgages for the term of the mortgage, but choice of product here is far more restricted.
Re-mortgaging in France is a lot less common than in the US, UK, Australian and Irish markets. One of the major reasons for this is that when you purchase a property in France with a mortgage, you need to register the deed of the mortgage in addition to the deed of the sale. Each time the mortgage on the property is transferred, the mortgage will have to be re-registered with a notary (notaire), incurring additional notary's fees. It is therefore very important that you ensure you have access to the best mortgage product, right from the start.
DQ: The UK property development market can be somewhat characterised by its large number of 'distressed' deals. To what extent have you seen a similar situation in France, perhaps where one or more covenants have been breached? Are the lenders proactively trying to work alongside their borrower clients to reach a mutually beneficial outcome or preferring to place the assets on to the market?
ALF: I would rather say that the lenders' reaction is more about their historical relationship with the borrower and its attitude when it has to face the financial difficulties. There may be situations where the borrower is in a "distressed context" (the loss of clients, bad tenants, LTV breaches or the departure of key management) and breaches the covenants of its financing arrangements, giving the lender the right to enforce its security of the shares and/or assets, or force the sale. Depending on the level of its security position, the lender may have interest either to enforce its pledge and become the owner of the assets or agree to forgive a portion of its debt in exchange for an equity stake in the borrower. The challenges facing the lender and the borrower are different and will depend on practical considerations: the quality of the assets, the scope of the business (key production sites and local employment issues). French laws provide a large range of preliminary cooperative processes between the lenders, creditors and the borrower (with or without the assistance of the court) and before any formal insolvency procedure is initiated. It is always the best interest of the lender to prevent the insolvency of its borrower client and take actions to save the deal with additional control and covenant packages, such as: restrictions on cash paid to the shareholders, sale of non strategic assets, restriction on the prepayment of other debt, tenants of better quality. Most of the time, the lenders would rather sit tight and wait for values to recover as the enforcement of the covenants would significantly increase the cost and their financial exposure when the value of the assets has not recovered.
DQ: Anne-Laure do you work with many overseas investors interested in investing into the French market? Is there a stereotypical asset and/or location they appear to favour most? What are the key challenges they face and how does Nixon Peabody assist them in overcoming these?
ALF: Yes, we work with foreign investors having a very clear picture of their 'wish list'. Paris remains a prime European office market, but we have recently seen some interest for other large French cities (Marseille, Lyon, Bordeaux, Lille) offering high quality transportation facilities and/or industrial expansion. The property market in France has shown remarkable resilience in the last few years, with prices only dipping between 4 per cent and 5 per cent. This compares favorably against much larger falls of 30 per cent to 40 per cent in many other European countries. Market data shows that property prices are continuing to rise in key investment areas, including Paris and the south coast, but the maturity of the French market also boosts buyer confidence for a safe and sustainable return on investments.
Among the foreign companies that have expanded in France in the past year are Amazon.com and General Electric (USA), Bertelsmann (Germany) and Nestlé (Switzerland). They, like others, made the choice to invest in high quality and sustainable buildings.
The interest for the French market remains dominated by office buildings well located in the centre of Paris and the Paris region (La Défense) or retail parks, warehouses and malls that could be operated under a renewable energy model (green buildings, photovoltaic power plants, pedestrian walkways). Both types of assets remain very attractive and more viable asset class for investors. France has more square metres devoted to retail warehousing than any other country in Europe, with a total of 23 million m2 and the development of hard discounters, combined with an increasing interest of developers and investors to commit to a sustainable approach in order to value their real estate properties is encouraging the development of large retail properties offering better accommodation for occupiers and consumers.
The investors we are advising know the market quite well. Depending on the type of investment, the key challenges they face are the environmental issues when the properties are located on industrial sites, the cost and duration of the acquisition process (pre-emption rights, authorisations and permits), but these are not new issues for European investors.
DQ: What are the restrictions in France regarding mortgage security within a transaction's capital structure (i.e.: senior and junior debt)? What is the trend in terms of the lenders' willingness to allow a fully subordinated junior debt loan secured via a 2nd legal charge?
ALF: In order to modernize and strengthen its financial markets, France undertook a comprehensive review of the rules relating to securities, by means of the Ordinance of 23 March 2006. Many of these have important legal implications but one of the major practical changes is that it has allowed to lower mortgage costs, set up the "Hypothèque Rechargeable" or "refillable mortgage" and decrease notary costs related to refillable mortgages.
As it was historically difficult and expensive in France to extend the mortgage to further loans, the refillable mortgage aimed to allow borrowers to enter into a mortgage that could be used to guarantee future loans up to a limit stated in the original mortgage deed. In addition, the same registered mortgage could also be a security for loans from different banks. It is accordingly possible to have an initial loan from one bank still outstanding when the borrower takes another loan from a second bank. Therefore, the second bank's mortgage is fully subordinated to the first bank's mortgage. The second bank may be very wary of getting involved especially if the first mortgagee could secure further credit. However, banks may show some willingness to allow such fully subordinated junior debt loan secured via a second mortgage since the more they are willing to take risks the higher the interest rate and potential income will be.
Under French law, borrowers must comply with several restrictions regarding mortgage security. In France, financial institutions are highly concerned with the financial credibility of the borrower whereas their American counterparts grant loans based on the value and solvency of the property. As a consequence, financial institutions in France require borrowers to submit extensive documents that provide proof of income as well as disclosures of all debt. In addition, a borrower's monthly mortgage payments cannot exceed 33% of his/her income. A life insurance policy that will cover payments in case of unemployment or death is also a mandatory part of a French mortgage, a requirement that is sometimes very costly depending on the loan.
Furthermore, if the mortgagor is a "consumer" within the meaning of the French "Code de la Consommation" then additional rules are involved such as the usual cooling off and advertising rules and the mortgage deed has also to explicitly provide that it is "refillable". Existing mortgages can also be changed to refillable ones by adding suitable wording which will need agreement of the borrower and the bank.
DQ: Here at Voltaire we continue to see a positive progression for the UK mortgage market. How do you see the remainder of 2011 developing both in France and overseas?
ALF: France's mortgage market is the third largest within the European Union, after UK and Germany. Due to the dominance of fixed rate mortgages, France's housing market is therefore arguably less prone to sharp upturns and downturns. Although French lenders have more stringent lending criteria than the UK banks, for those borrowers who can meet these criteria, there are some exceptionally attractive low rates on the market: at the end of 2010, you could still get a 25-year fixed rate at 3.8% or 3.5% over 15 years at 80% of the purchase price, which in UK terms was phenomena.
According to data from the first three quarters of 2010, EU mortgage markets will continue to experience an overall moderate recovery and the general outlook for rates on French mortgages looks good for the remainder of 2011. Indeed, these rates should slowly raise to around 5 % - 6 % between 2011 and 2012.
In the United States, slow growth and stricter regulations, which is to come into force in 2012, will result in a decrease of the number of "high-risk" mortgages. Even though interest rates will remain low, individuals will need at least 25% equity in order to qualify for the best interest rates. Therefore, many individuals will still not be able to take advantage of low rates since they will not qualify for a loan.