CBRE Investment Management: Understanding the niche for mid-market strategies

Emma Huepfl, managing director, EMEA Credit Strategies, and Chris McMain, head of origination of CBRE Investment Management’s debt business in Europe, discuss how the firm is tailoring offerings to obtain the best mid-market opportunities.

This article is sponsored by CBRE Investment Management.

What were the key events for your lending business last year?

Emma Huepfl: We focused on funding value-add business plans under senior and whole loan execution strategies, where we saw a clear opportunity to capitalise on the ongoing hesitancy of regulated bank lenders in this part of the market, particularly for mid-size deals.

We integrated credit into a global vertical and, as a result, have benefited from being directly linked to our US team working to a similar strategy in its US Credit Partners fund. Investors appreciate the optionality of global credit products and different execution formats within our platform.

“There’s a tremendous will to get back to a normalised, pre-covid way of doing business in 2022, and the start of the year feels encouraging”
Emma Huepfl

We also added a credit-specific research function to our platform, with the hire of Dominic Smith (a senior director in CBRE IM’s research team), that gives us a framework to harness CBRE’s credit data touchpoints and will offer investors new solutions to analysing relative value between credit, real estate equity and other institutional asset classes, which we believe will be a highly differentiated offer in 2022.

Why were you particularly active in the mid-market?

Chris McMain: For this loan size – €20 million-€75 million – borrowers tell us they find it particularly hard to source funding for value-add business plans. It is a combination of the sophisticated underwriting required for these specific business plans and the ability to execute efficiently where the market is not meeting the need.

To be competitive in this part of the market, we have worked very hard on two things.

Firstly, early and decisive screening to filter the deals where all sponsor, asset and business plans look supportable and, secondly, working with an equity mindset to ensure we are fully engaged with the asset journey. Our financing structures facilitate the business plan vision and allow for early intervention and mitigation if underperformance occurs.

How do you identify borrowers in this part of the market?

Chris McMain

CM: We have clear sponsor criteria: they must be well-managed and strongly capitalised. We also expect them to be highly experienced in the type of asset we are funding.

Since we are not providing super core or jumbo loans, we are focusing on borrowers who understand their niche extremely well and are focused on operational performance; those sponsors tend to be best at executing mid-market strategies.

How important is it to back schemes where the borrower is investing to make the property suitable for future demand?

CM: We prefer to lend into business plans where the property will improve over time rather than deteriorate either physically or via shortening weighted average unexpired lease term. Edinburgh One (CBRE IM provided a £36.5 million (€44 million) acquisition and capex loan to Odysseus Capital Management for the Edinburgh One office scheme) is a great example of a brilliantly located property in a capital city which will be delivered to the very highest standard with exemplary ESG credentials, undertaken by an expert borrower. It is great to think our lending goes towards improving the physical landscape in an environmentally responsible way.

What are the main challenges and opportunities of 2022?

EH: There is a tremendous will to get back to a normalised, pre-covid way of doing business in 2022, and the start of the year feels encouraging with plenty of transaction activity. We are well-capitalised and ambitious, so our opportunity is to grow the book.

The on-going need to supplement traditional sources of debt capital with non-banks is also clear. We will continue to work in partnership with our borrowers to provide efficient and specifically structured funding that banks aren’t set up to do.

CM: Challenges for lenders and borrowers alike include the very fast change in use of real estate, and rightful investor/occupier focus on how the built environment must address the climate crisis. Fortunately, our firm has very detailed insight to help us make the right lending calls in a very changeable landscape.

EH: Interest rates will be a focus for borrowers and lenders in 2022 and beyond. As well as ongoing serviceability in a higher rate environment, we’ll carefully consider refinancing prospects in a higher rate environment.

What are your predictions for the next five years for the market?

EH: ESG will become a baseline underwriting requirement and the industry will work to find consensus on recognised standards. At the same time, in places where there is not enough economic viability to invest in sustainable building improvement, funding will be scarcer and values will decline. This could ultimately threaten the levelling up agenda.

Lenders will need to get comfortable with less conventional ways of underwriting loan positions, which will benefit lenders with wider real asset operational experience and additional insight.

CM: Borrowers will need to evidence genuine capability to their lenders in the changing environment. Those who operate at arms-length and without specialism may find it increasingly difficult to raise debt capital in all but the most core parts of the market.

What does the future hold for your debt business?

EH: We want investible capital right across the spectrum to ensure that we can respond to good value opportunities in credit – from core to opportunistic. All sectors can be considered, but we are careful to ensure that we only lend on what we understand.

We are a global business, and at the right time, where market opportunities exist, credit should be part of our offer in an increasing number of countries where we invest in real estate.

Credit investors will be able to access a full portfolio solutions offer via our debt platform – we can help create a balanced portfolio within real estate accessed via equity or debt; tailored for individual risk appetite and long-term objectives.