Cashflow attracts lenders to alternative sectors

Debt providers see a convergence of lending criteria between alternative and traditional assets.

European real assets debt providers are seeing a widening opportunity in ‘alternative’ asset classes, as lending criteria begins to match that of the more traditional segments, according to panellists at last week’s CREFC Europe Autumn Conference in London.

Properties in asset classes outside the traditional office, retail and industrial sectors, are increasingly meeting income forecasts, lease requirements and investor demand typically expected from traditional assets, they argued. In today’s market, life sciences, purpose-built student accommodation, co-living, cold storage and other types of operational asset are increasingly attractive to lenders.

“The past 15 years have been extremely dynamic in the sense that we have seen an influx of new investors with a lot of institutional equity come into our market, which has meant the definition itself of infrastructure has widened,” Pierre Kahn, EMEA head of infrastructure and energy financing at German investment bank Deutsche Bank, said on a panel at the event.

The bank has responded to the increased scope of infrastructure assets, across his division and its adjacent real estate business, Kahn added. “Suddenly we are looking at all kinds of assets, and some alternative assets now fit our traditional lending characteristics, where we look at protected cashflow, long-term contracts and the resilience of the asset through the economic cycle.”

Kahn explained his team is now looking at assets such as data centres, cold-storage and retirement homes, which it would not have financed in the past. He said the bank sees these as secure assets with strong cashflow, which are attractive to infrastructure debt and equity investors.

“Some alternative assets meet our lending criteria so well that we have solely financed them out of the infrastructure finance desk,” he said.

Arron Taggart, head of UK investment at London-based alternative lender Cheyne Capital, elaborated by saying two things have happened in the last 15 years that accelerated the move into alternatives: The move away from long leases, predominantly found in offices and retail, and the emergence of more operational assets like build-to-rent residential and hotels.

He explained there was more opportunity within these asset classes comparatively and capital therefore followed this trend.

“I’m struggling to define what a traditional asset class looks like now, because we very rarely see them. It’s nearly all operational, healthcare, senior living, and hotels,” Taggart said.

“I think one of the consequences for us is that we do need to understand how to underwrite an operational business. It’s really what distinguishes a good asset and a great asset plan from something that isn’t so great,” he added.

The panellists also discussed the shift in the market from investors and lenders merely collecting rent and loan income, towards all parties understanding the operational aspects of a sponsor’s business.

Plan B

Lending against operational focused real assets comes with layers of complications and having a plan B is imperative, Taggart said.

“We have real life examples of when lending into co-living or serviced offices – you only have to look at what’s happened in the serviced office space recently – to understand that you need a plan B in place. We’re not just talking about the different levers on cash flow or loan-to-values. it’s operational, he said.

“You need to be able to take control of the operations of that building and the business and say, ‘we’ve got solutions because we’ve been thinking about it for quite some time’, and you just put into action that plan B,” he added.

Pierre Leocadio, head of investments at Canadian real estate investment firm Oxford Properties, also speaking on the panel, stressed the importance of sponsors choosing a lender that understands the sector they are writing a loan in, to form a “true partnership”.

“Main difference when you go into operational real estate is that investor performance is not just linked to the real estate but also to the occupier underlying business performance. You and your lender thus need to know more about the underlying business, performance drivers and develop a deep sector expertise as you’ve less certainty on the future cash flows of your property,” he said.

“If you go back to during covid-19, if you didn’t have a true partnership with the lender, you could be in trouble pretty quickly,” he added.