This article is sponsored by Allianz Real Estate
What has been the biggest impact of covid-19 on your lending strategy?
I think the main reasons for investing in debt – duration, diversification, spread over benchmark, cycle resilience and the ‘strategic play’ – have not changed.
Borrowers are still requesting long-term, fixed-rate senior core loans, driven by historically low interest rates. But the covid-19 crisis created volatility which meant that, when we came out of the first wave of lockdown, there was a window of repricing of debt for core-plus real estate, which we had not seen before. Suddenly, we had the opportunity to finance refurbishment and development transactions with a combination of lower risk and higher return, and a spread over the benchmark which was comparable to other fixed-income alternatives.
In some cases, the repricing for loans against value-add assets was so substantial – as much as an additional 150-250 basis points – that we were achieving a return on debt that we had previously only had for equity on top prime investments. As a result, around €900 million of our transactions last year were related to development and refurbishment, which we did without necessarily having to go up the risk curve.
The other thing this situation has made clear is that real estate remains a very local industry. We thought we were acting in a pan-European market and that everything was unified, but that is not the case. Different governments have responded to the crisis in very different ways.
Your debt fund is open to group insurers and external investors. How did insurers’ views of debt change last year?
This is not necessarily related to the covid-19 crisis, but an increasing consideration of insurance companies under European Solvency II regulation is risk capital charges. They are very favourable to debt transactions, on one condition: that you find an investment structure that provides you with a full look-through to the individual assets, even if you invest via a debt fund. That is why our fund vehicle in Luxembourg turned out to be successful. It allows each investor to have full visibility on each individual loan, meaning they can book extremely low-risk capital charges compared with real estate equity.
What are the opportunities for 2021?
We are seeing a big increase in investors concerned with environmental, social and governance, and that is another reason why we have been keen to source refurbishment and redevelopment-focused opportunities – particularly where new flexible and future-adapted green buildings will be created. This is not only about returns; we like the idea that when those buildings are delivered, we will have financed a state-of-the-art property that is addressing the key questions about where and how we work now. This is likely to be a main investment theme in 2021 and 2022.
We will have opportunities in fixed-term assets because there will still be refinancing deals to be done. I think the scope of lenders will also remain very diversified. The roadmap to successful deployment of capital will continue to be our unconstrained pan-European origination capacity and our ability to directly structure deals independent from syndications.