Real Estate Capital spent 2019 talking to some of the European real estate lending market’s key players about the issues on their minds. Here are abridged versions of some of the year’s interviews, starting with the head of German bank DekaBank’s real estate division, the chief executive of developer Apache Capital, and the head of Italian insurer Generali’s debt strategy. More interview highlights will follow on 24 December and 26 December.
Sebastian Vetter, head of real estate lending, DekaBank
In September, we spoke to the recently appointed head of German bank DekaBank’s property lending business about his plans for the business and the challenges in the bank’s core markets. Read the full interview here.
Real Estate Capital: What is your view on the UK and how are you approaching financings in this market amid Brexit?
Sebastian Vetter: The UK is such a prominent investment destination, despite possible struggles that could be caused by Brexit. We are confident that the assets we finance – landmark buildings with long leases and moderate leverage – will be resilient, despite some bumps on the road in the short term. If you provide a five-to-seven-year loan, then you shouldn’t see an impact on the asset’s cashflows. A temporary drop in values would increase leverage but this wouldn’t hurt us too much as our average loan-to-value is 50-55 percent in the UK. Also, in the last six to 12 months, we have also focused on markets outside London, having recently closed deals in Birmingham and Glasgow, to make sure we diversify our portfolio.
REC: Are you finding that prime German stock has become overvalued?
SV: We are probably at the peak now. Values have been so far sustained by low interest rates and liquidity in the market but any further rise from now onwards might create a situation of overvaluation. We are now being more opportunistic when sourcing deals in Germany. Rather than looking for deals actively, we support our existing international clients with their German acquisitions. If we do a couple of deals per year in Germany with a return that still makes sense, that’s fine.
REC: What headwinds are you focused on in Europe?
SV: We are monitoring very closely the political developments in Italy to see how they could impact us there, as we have a small Italian loan portfolio and we are targeting up to €100 million in Italy per year. More generally, macropolitical developments within Europe and the ongoing trade war between the US and China is definitely something to watch, since it could impact investors’ appetite for new real estate deals.
John Dunkerley, co-founder and chief executive, Apache Capital Partners
London-based Apache is one of the few developers to deliver purpose-built rental residential units in the UK market. In September we caught up with the firm’s co-founder and chief executive to find out how much debt is available for such developments. Read the full interview here.
Real Estate Capital: Is it difficult to source debt for build-to-rent?
John Dunkerley: Sourcing debt is difficult. You need to rely on debt funds because they need to deploy capital and can offer certainty. We have experience of banks offering us a provisional set of terms, but when the eventual valuation came back it was lower, meaning the deal didn’t stack up. That is a problem when you are under pressure to finalise your construction contract. Investors demand competitive debt terms, but banks will usually only go to 50 percent LTV. It doesn’t work when you require higher leverage to support returns targets, as with our first platform. If you need 65 percent LTC, banks are not likely to provide it because of a lack of transactional data in the BTR market.
REC: Do you expect banks’ appetite for BTR to grow?
JD: A lot of valuers are waiting for deals to close to build data in the sector. We are starting to see yields at 4 percent and rents at a 10 percent premium for new residential developments, so liquidity from the banking sector will gradually increase. I get the impression with the banks that the guys on the ground want to do the deals but are held back by investment committees that need to make difficult decisions in this market, especially given the political climate.
Back in 2015, we borrowed from pbb Deutsche Pfandbriefbank for Angel Gardens. At that point, there were few debt funds in the market, so it made sense to borrow from a German bank that was able to rely on its experience of financing multi-family properties in continental Europe.
REC: What could lenders do better?
JD: I’d like to see banks be more flexible in their underwriting. Valuers make certain assumptions, such as lower rents, despite market conditions improving. Debt funds are more flexible. Above all, we need certainty of funding, because delaying build contracts can mean increased costs, which can jeopardise a deal. But these are the problems you need to manage as an early mover in a market.
Nunzio Laurenziello, head of debt investments at Generali Real Estate
Italian insurance company Generali launched a real estate debt strategy in 2019. In September, we published our interview with Nunzio Laurenziello, who is spearheading the strategy. Read the full interview here.
Nunzio Laurenziello, head of debt investments at Generali Real Estate, likes the challenge of a fresh start.
In May 2018, he was hired by the property asset management arm of the Italian insurer to launch its first commercial real estate debt platform. The fact Generali is already a huge presence in European real estate equity markets with €30 billion of assets under management, as well as the potential size of the debt vehicle, which has already raised €1 billion from the group’s insurance companies, made the task even more enticing.
Laurenziello started talking to Aldo Mazzocco and Alberto Agazzi, chief executives of Generali Real Estate and its fund management business respectively, about the vehicle a year-and-a-half ago. “I was very excited about this challenging new project. For this reason, I decided to move from the investment banking sector to asset management.”
The launch of the strategy is intended to diversify the insurer’s investment strategy and appeal to investors with different risk-return requirements than those in the real estate equity market. Laurenziello’s goal is to help Generali to achieve in the region of €3 billion of exposure to commercial real estate debt within the next three years. It will focus on senior lending, although as much as 25 percent of the fund can be allocated to higher yielding loans.
“In recent months we have noticed strong demand for real estate credit strategies, especially from insurance companies and pension funds seeking stable and recurrent returns but without the capacity to launch a dedicated commercial real estate debt platform on their own,” Laurenziello says.
For such investors, property debt offers fixed income, with the added bonus of the borrower’s equity stake in investments cushioning potential losses. For Generali, he adds, external fundraising boosts the scale of the platform, making it more visible in the market.
“There is a mix of reasons to be open to third parties. Besides the importance of having a large platform to achieve visibility, we would need higher equity commitments to be able to deploy capital in loan tickets with a relevant size, where we think there are more opportunities for deals,” Laurenziello argues. “Obviously, we are an asset manager and one of our targets is to increase income through fees, so opening to third-party investors would allow us to deploy additional capital and simultaneously increase income.”
Since the global financial crisis, non-bank lenders have taken advantage of the market opportunity created by the banking sector’s need to de-lever due to tighter regulation.
“Insurance companies like Generali are aware of the market opportunity created by the banking regulatory restrictions on lending against property,” Laurenziello says. “In Europe, more than €500 billion in commercial real estate debt is expected to mature in the next four years.” He adds traditional bank lenders will not have the capacity to refinance it all: “This shifting dynamic creates a big window of opportunity for alternative lenders.”
Laurenziello argues private real estate debt’s appeal to investors is growing stronger the further we are into this prolonged cycle. “For those investors seeking to reduce volatility, investing in senior property debt is probably the best proposition. It offers lower returns than equity, but they are very stable.”
Investing in senior debt is a defensive strategy, he adds: “Through our fund, we will invest mostly in commercial real estate loans with 60 percent loan-to-value. This means an equity buffer of 40 percent that would absorb the first loss in a falling market.”