2019 review: REC’s year in interviews – part 2

During 2019, we spoke to some of the leading participants in the European real estate finance market. Here is some of what they had to say.

In the second instalment of our review of Real Estate Capital’s biggest interviews of 2019, below are abridged versions of our interviews with the head of Lloyds Bank’s real estate division, investment firm Europa Capital’s head of asset finance and the head of real estate at French bank Natixis. More interview highlights will follow on 26 December.


Madeleine McDougall, managing director, head of real estate and housing, Lloyds Bank

In July, we spoke to Madeleine McDougall, head of UK bank Lloyds’ property division since 2017. McDougall spoke about the decision to structure the bank’s leading property role as a job share with colleague Andy Hulme, in order to strike a better work-life balance. Read the full interview here.

“We are not splitting responsibilities, we are sharing them,” McDougall told Real Estate Capital. “I will be working three days a week: Monday, Tuesday, Wednesday; while Andy will work Wednesday, Thursday and Friday. We will have a full day working together on Wednesday, when we’ll have a proper handover and discussion on what needs to be done.”

Hulme’s appointment is the first senior role to be structured as a job share within Lloyds’s commercial banking division and a rare move within the industry.

McDougall: sharing role with Andy Hulme

“A job share like this, involving a female and a male doing it together, both because they have families and they want to ensure that they spend time with them, is a very powerful message to the industry,” McDougall said. “You need role models to have a more diverse workforce. I’ve been amazed by the feedback I’ve had about why it is great to see people at a senior level doing this.”

For McDougall, Lloyds has been “incredibly supportive” in understanding the needs for flexible working, despite the cost implication of an effectively six-day role rather than the usual five-day position.

“Lloyds has shown that is miles ahead of the real estate industry. If companies want to engage with their most productive talent, then they have to understand what suits them, so their staff is more engaged and productive at work,” McDougall said.

“We always speak about how we reflect society in the real estate industry and one way to do it is to really understand how people with different backgrounds want to work, rather than dictate them how they should work,” she noted.


Belinda Chain, partner and head of asset finance, Europa Capital

In June, we published our interview with Belinda Chain, who at the time was head of asset finance at real estate investment firm Europa Capital. Chain discussed what it is like to be a borrower across Europe’s real estate markets. Read the full interview here.

Real Estate Capital: How liquid is the European real estate debt market?

Belinda Chain: Several types of lenders – banks, insurers, alternative lenders – are offering different types of finance. The financial broker model has also gained traction, meaning firms without in-house finance teams can turn to people with expertise to source debt for them. So, it is generally a liquid market, provided the price expectations of the debt provider match the sales expectations of vendors.

It is a good time to be a borrower in the core property space. We are in an amazingly low interest rate environment, with the 30-year rate for both sterling and the euro well below 2 percent. It is cheaper debt than we may see again.

Chain: flexibility in covenants is important

REC: What difficulties do borrowers face?

BC: Debt for certain investments in the value-add space can be in short supply. There is a lack of lenders prepared to take refurbishment or redevelopment risk. They still want pre-lets, but occupiers are less inclined to forward-commit to properties than in years past.

The lack of truly pan-European lenders is also a challenge, especially for our pan-European strategies. Finding lenders willing to write loans which span different jurisdictions without needing to silo debt into country-specific facilities can be tricky.

Having an umbrella facility with a single lender helps keep management costs low in order to maximise distributions to investors.

REC: How would you like to see lenders improve?

BC: I’d like to see lenders issue binding terms earlier in financing processes. A result of the financial crisis is no-one wants to commit to a deal until the last minute, and that can make it difficult to navigate the expectations of buyers and sellers. It also makes it more difficult to give a lender exclusivity in a deal, in case they pull out.

REC: What do you look for when structuring a deal?

BC: For the value-add strategy, we need to tailor each loan to the underlying business plan.

Flexibility in covenants is important. If an operational asset needs to be closed while improvements are made, it might mean there is no income temporarily, so covenants need to reflect that. We also look at the detail behind the covenants. For example, we will ask how net rental income is calculated. It’s fine to have an income coverage ratio covenant, but if the definition of income is too limited, it can be a problem.

When we are sourcing senior debt for core strategies, it is almost entirely price-driven. In core strategies, distribution to investors is key, so loan pricing is crucial, although we will also consider factors such as substitution rights, so we can add or remove properties from a portfolio.

Lenders’ hedging strategies can also be a factor. Hedging can be very lucrative for lenders, but it is often not beneficial for borrowers. We target well-informed lenders who are not just aiming to cross-sell products. They understand the risks of the market we operate in and how to tailor the facility to those risks.


Emmanuel Verhoosel, global head of real estate and hospitality, Natixis

In June, we published an interview with Verhoosel, who leads the property lending division of the French bank Natixis. Verhoosel explained how the bank’s originate-to-distribute strategy allows it to tap into global institutional demand for real estate debt. Read the full interview here.

Emmanuel Verhoosel, global head of real estate and hospitality at French corporate and investment bank Natixis, believes real estate banking should reflect the global nature of capital flows. “We can’t simply focus this business on Europe,” Verhoosel tells Real Estate Capital. “The globalisation of the real estate market is accelerating. Our clients look at property from a global perspective, so we need to adapt to that.”

On a net basis, Nataxis data show cross-border real estate investment activity has increased from $32 billion in 2009 to $155 billion last year. North American and European firms, Verhoosel says, are the largest exporters of this capital, though he notes Asian investors are playing a growing role in worldwide capital flows.

Emmanuel Verhoosel, Global Head of Real
Estate & Hospitality for Corporate & Investment Banking, Natixis. Paris, France. 9 April, 2019.

“Regional diversification has been key for some real estate companies to lock-in higher returns,” he says. “Also, investors are becoming bigger. The proportion of international investment by these large players is increasing.”

The former JPMorgan and ING banker was hired by Natixis last September as part of its plan to restructure its activities. The bank has been moving from a product-based approach – which included the bank being arranged into divisions including capital markets and M&A advisory – to divisions focusing on four sectors: infrastructure, energy and natural resources, aviation, and real estate and hospitality.

“We are competitive in the market worldwide because we operate a completely international distribution strategy,” he says. “We know where, around the world, are the pockets of interest for each type of transaction we undertake, whether that be European, American or Asian money.”

The engine of this strategy is an originate-to-distribute model. This has already enabled the bank to underwrite a large volume of transactions – the figure for 2018 was in the order of €14 billion – and sell on a large proportion of its credit exposure to capital partners with varying risk appetites. Verhoosel, who is based in the bank’s Paris headquarters, says the rationale is to encourage a change in culture from a transactional to a client-focused approach. It brings a wide range of property sector clients within his remit, including asset managers, listed firms, sovereign wealth funds and family offices. With staff based across seven offices in Europe, the US and Asia-Pacific, the aim is to follow real estate borrower clients into whatever global ‘gateway’ cities they choose to invest.

In 2018, Natixis distributed €11 billion of real estate loans to other lenders based in 16 countries. The US, French, German and South Korean markets were its major distribution channels. Around a third was sold to banks and the remainder to other types of financial institution.

For loans written in the European real estate market, Natixis typically retains a 25 percent stake on its balance sheet and syndicates the remaining three-quarters. The ability to sell risk on to interested parties allows it to underwrite deals including higher-yielding elements. “We hold only conservative, defensive positions on our book,” explains Verhoosel. “There is not a defined leverage point we are able to underwrite before syndicating a mezzanine piece.” He adds that the bank will typically find a buyer for the mezzanine tranche before underwriting a loan.

“We operate like a mix between an investment and a commercial bank,” says Verhoosel. “Like a commercial bank, we are trying to find financing solutions for clients by using our balance sheet. But, like an investment bank, we have a distribution and cross-product model. We look at solutions that often include M&A or capital markets. I have worked in both environments before.”

Verhoosel describes a growing profile of syndication partners. “There are a lot of new debt funds in the market, particularly in the mezzanine finance space. There are also asset managers and insurance companies. We do syndicate debt to other banks, as has been the case for many years, but that represents a lower volume of our distribution now. Non-bank financial institutions are the largest part of our distribution network.”

Asian capital is frequently cited as a key source of liquidity in the real estate financing markets. Verhoosel says the greatest demand from Asian lenders is for the US loans the bank writes, because the US market generates higher yields and returns on investment than Europe. Asked where he expects the greatest growth in capital allocations to real estate, including debt, Verhoosel answers quickly: Japan.

“It’s the biggest market we are watching,” he says. “There is a huge potential volume of capital as the Japanese pension funds and insurance companies diversify. An increase in allocations from Japan would be a gamechanger for real estate markets globally. We are not seeing much investment yet, but that can change quickly. It will only take one or two firms making the first move.”

He adds that regulation will continue to play a role in encouraging a greater diversity of lenders in the global real estate markets. “Banks are facing the latest round of Basel legislation, so they are more likely to operate as arrangers rather than hold vast amounts of debt on their books. There is a place in the long run for insurance companies and other non-bank lenders.”