News that Allianz Real Estate intends to expand its lending scope to include development, and even junior loans, might have surprised some in the property finance community.
The German insurer has been steadily expanding its debt portfolio, but it has been a core, senior lender since it began providing loans in 2011. Looking forward, however, around a fifth of its annual business could be in “enhanced products, including development loans”, debt boss Roland Fuchs told Real Estate Capital at MIPIM.
Allianz is not the only lender aiming to add an element of higher-margin business into its debt portfolio. During MIPIM, several industry players noted that other lenders, including German banks, are increasingly backing transitional or value-add assets, to capture higher returns than those provided by their bread-and-butter business.
The weight of capital focused on low-risk deals is driving loan pricing down across Europe. Prime margins in Germany continue to be reported as low as 60 basis points. In Paris, some senior lenders are writing loans at below 100bps, as the market remains stable and liquid. A recent office refurbishment in the city’s La Défense business district, by contrast, was financed at a margin of more than 200bps, noted one source.
At this late stage of a prolonged cycle, it is perhaps natural that senior lenders are forced to take more lending risk to protect their profits. Their clients – including experienced, core investors – are eager to find opportunities to add value to assets to create the sort of core buildings that many owners are unwilling to sell.
Besides offering a margin premium, lending against business plans that promise some capital value uplift might even prove more sensible than financing well-leased, shiny buildings where the only movement in value in the coming years will be downwards.
Lenders should, however, keep a tight grip on what they consider acceptable risk, especially as the market gets hotter. As the UK Property Industry Alliance working group monitoring long-term value has said, losses made in the last stage of the cycle can wipe out profits made across the whole cycle.
Overall, lenders do seem to be prioritising caution. Indeed, in the UK at least, Link Asset Services’ recent survey revealed that competition in the conservatively-leveraged, senior space increased, with some non-bank lenders – which tend to focus on higher-yielding lending – expanding senior strategies.
Leverage is generally being kept in check. Loan-to-value is typically within the 60-65 percent range across Europe, although Cushman & Wakefield, in last autumn’s EMEA Lending Trends report, did note a 1 percent increase in average LTV to 61 percent.
However, an increased appetite to take a little more risk is evident, to supplement core business. In Allianz’s case, for example, Fuchs argues that the firm will only lend against properties that it would be prepared to buy through its value-add equity strategy.
Incorporating an element of heightened risk into otherwise vanilla lending portfolios can make sense in a market with fewer core opportunities and wafer-thin pricing. However, maintaining a focus on the quality of sponsor, location and asset will be more important than ever in a riskier market. As competition intensifies, the likelihood of making the wrong lending decisions increases.
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