While European real estate debt remains a lucrative sector in which to work, the trend seen in recent years towards higher salaries and bonuses was not universally evident in 2022’s tougher market conditions.
Compensation data collected by real assets executive search firm Sousou Partners, shared exclusively for a fourth year with Real Estate Capital Europe, reveals minimal growth – and, for some, a drop – in pay packets at the industry’s traditional big spenders, the investment banks.
Meanwhile, in the other main lender group monitored by the firm – alternative lenders – remuneration continued to grow, albeit by significantly less than in the previous year.
During 2021, amid a clamour for talent, Sousou recorded a 31.6 percent median increase in total compensation at the associate level within non-bank lending organisations. In 2022, at the same level of seniority, overall compensation growth was a more modest 9 percent.
Last year’s figures need to be considered in the context of soaring inflation, says Peter Field, a partner at Sousou. “The alternative lenders are up with inflation, and in many cases, above inflation. The investment banks are flat or slightly down on last year overall. So, in real terms, the drop on the investment bank side is significant.”
The data shows it is still possible to earn the highest pay within the investment banks. However, alternative lenders closed the gap last year, with median total pay even slightly higher at non-bank organisations at certain levels of seniority.
Lending conditions in 2022 explain the trends, Field says. “Investment banks rely heavily on transaction volume for fees, whereas alternative lenders benefit from steady management fees. When transaction activity stops, as we saw in the latter part of last year, investment bank revenues are hit.”
Increasingly, adds Field, alternative lenders are demonstrating appetite to take on the large and complex financing deals typically associated with investment banks. “People who moved from banks to alternative lenders in the past 18 months will no doubt be pleased with their decisions,” he suggests.
Arron Taggart, head of UK origination at alternative asset manager Cheyne Capital, says pay expectations in the alternative lender space were high last year. “Wage inflation and expectations were fierce. But the heat has come out of the market in the past few months on the back of the slower market in late 2022 and into 2023,” he says. “In the coming year, we expect inflation will be less of a factor, driven by a combination of a slower hiring market and more talent being let go last year, especially from the investment banking side. There are quality people out there, which is encouraging to see.”
Field has not witnessed large-scale redundancies from the real estate units of investment banks. But he has noted a significant cut in bonuses for those at the lower end of the pay scale at each level of seniority. “The poor performers at the investment banks have been punished,” he says.
Tough at the top
Another key trend during 2022, Field notes, was lower base salary growth and, in cases, larger bonus cuts, at the highest level of investment bank real estate teams, and less wage growth for the highest ranked personnel at alternative lenders.
“The greatest compression is coming at the senior end, so the managing directors have seen the biggest decreases or the smallest increases,” he says. “It is likely that, as we have seen on the equity side, senior management have forgone large pay increases to allow junior members inflation-plus rises. Senior management tend to make hay when the sun shines but bear the brunt when things get tough.”
“People who moved from banks to alternative lenders in the past 18 months will no doubt be pleased with their decisions”
Within the non-bank lender market, organisations appeared keen to retain or attract mid-ranking and junior personnel with relatively large increases in base salary and bonuses. A scramble to hire staff in early 2022, before market conditions worsened, put a strain on the supply of junior candidates, Field explains. Managers’ greatest need last year, he adds, was for individuals capable of managing financing deals from start to finish, rather than for deal originators.
“There were not as many people available at this level as you would normally expect because people had missed out on valuable deal execution experience due to covid,” Field says. “There is a dearth of talent at the junior and mid-range.”
Dan Pottorff, head of debt investments at real estate manager Tristan Capital Partners, assembled a senior team in 2021 and has more recently added mid-level and junior members. He says it is often necessary to look for people in the wider real estate investment market.
“At the junior level, there is more flow into the debt space from related sectors,” says Pottorff. “You need to compete with a wide set of options to hire people from private equity firms, so compensation needs to be comparable to the equity side of the industry.”
The shock dealt to the industry in the second half of 2022 by rising interest rates, and the resulting slowdown in property acquisition activity, has impacted real estate lenders of all types. While many in the sector foresee a period of opportunity ahead for lenders with available capital, they also acknowledge market conditions in recent months have been highly uncertain.
As a result, says Field, hiring activity for real estate debt roles has been quiet this year. “A lot of teams grew in 2021-22 and have now settled down to focus on workouts and refinancings. With so few new acquisition deals in need of finance, the mad rush for talent has ended, for now.”
Pottorff witnessed a competitive hiring market when assembling his senior team but agrees the hiring landscape is quieter for the time being. “Up until this time last year, there was huge demand for people with experience in the debt fund world. But in the past six months, some managers seem to have put hiring decisions on hold.
“They know there has never been a better time to be in the debt space. But they are weighing up the conviction there is a huge opportunity ahead with the immediate difficulty of adding expensive people at a time when revenues are down. It’s a difficult call for them.”
Josephine Jones, a senior adviser in the real estate debt market, relocated to Europe in March 2022 following 10 years in Hong Kong, where she held roles including managing director for real estate finance in Asia-Pacific for banking group HSBC. Operating in the European market for the past year, she has witnessed a growing appetite to lend from non-bank organisations, coupled with slower decision making among them, due to uncertain conditions.
“The investment banks are quick to respond to market conditions – they are often the first to contract and the first to expand”
Real estate debt adviser
Some fund managers, she says, have tentatively explored the market without committing. “It has been a volatile market. We have seen some strategic hiring, but, in general, managers have been hesitant to take big decisions.”
There is appetite among managers to lean into debt strategies, she says, but capital-raising and market uncertainty has added challenges. “Managers recognise this is an exceptional credit environment, where in many situations risk-adjusted returns from debt are more attractive than equity. But capital-raising has been challenging, so many put key moves on hold. There has been some recycling of human capital from the equity to the debt side of businesses.”
As lenders come to terms with the ongoing repricing in the real estate industry and become more determined to deploy capital, Jones expects to see more senior hiring in the alternative lender sector, as well as a resumption in hiring by investment banks.
“The investment banks are quick to respond to market conditions, they are often the first to contract and the first to expand,” she says.
Despite the quiet hiring environment, Cheyne’s Taggart believes people are willing to consider new roles in debt. “We are getting fed talent a lot by head-hunters,” he says.
“Although the top layers of lending organisations tend to be more static, you can still find good people for mid-level and junior roles. There is a nimbleness in the debt fund market that appeals to people, and, more generally, a better work-life balance than in the investment banks.”
While demand for personnel in the alternative lender market is expected to grow, a return to the sharp upward trend in salaries and bonuses is unlikely, says Field.
“It’s important to remember that, between 2020 and 2021, especially at the junior end of the spectrum, total compensation for alternative lenders was up as much as 39 percent. That was an effort to be competitive in a market in which investment banks have drastically increased compensation. Retaining talent was a huge issue. Then, it was a candidates’ market. Now, it is a clients’ market.”
While Sousou typically represents employers, more individuals are approaching the firm, he adds. “Some see it as a good time to reposition themselves. Many in the market expect six to 18 months’ time will be a golden time to invest because there will be a correction followed by opportunities to invest.
“By then, things will feel very different in the investment banks as transactional activity will increase, and so will profitability.”
While Field accepts hiring activity is down for now, he insists plenty of debt specialists are willing to hear about potential opportunities that may emerge in the latter part of the year. “It is a good time to have conversations with top talent that would not usually be open to a conversation in a better market.”