Legislation came into effect in France in November allowing non-bank entities to originate loans directly. This has prompted the country’s real estate debt fund managers to reconsider their strategies.
“Before the end of the French banking monopoly, alternative property lenders organised in the form of securitisation vehicles could not lend, but acquired loans on the secondary market from a banking institution,” says Christophe Murciani, head of commercial real estate debt funds at Acofi Gestion.
The change creates direct lending opportunities for specialised financing vehicles – which can invest in any type of asset but are aimed at professional investors – as well as securitisation vehicles and private equity funds. Tiana Rambatomanga, head of law firm Stephenson Harwood’s investment funds practice in Paris, notes that non-bank lenders are gradually becoming direct originators to provide a “more flexible” and “tailor-made” lending offer without partnering an originating bank.
Issue of legitimacy
“This regulation legitimises alternative lenders, including property debt providers, as real actors within the French market,” Rambatomanga says. ”Real estate debt funds will be able to provide credit and propose to their investors new types of attractive debt products, which was not possible in France before the regulation came into force. We will progressively see more players providing debt products, which will offer more debt liquidity and accessibility for borrowers.”
The option to lend directly is being taken mainly by mid-sized debt funds, Rambatomanga says: “Mid-market debt funds have more appetite to originate their own loans within their area of specialisation, while players doing larger financings or global asset managers might prefer to partner with banks.”
Acofi is one such mid-market player. In December, it provided its first directly originated loan to Swedish private equity firm EQT Partners: a €27.2 million facility to finance the €42 million acquisition and renovation of an office property in Paris.
Murciani says that direct loan origination allows lenders to capture more fees than on a syndication basis and allows them to be closer to their borrowers’ business plans and write debt accordingly, with more control of aspects such as the structure of covenants.
Fewer direct benefits
However, for asset management giant Amundi, originating loans directly is not as beneficial. The firm – which entered real estate lending last year after launching a senior strategy that aims to deploy €800 million across Europe through a commingled fund and a segregated lending mandate – prefers to partner banks.
“This regulation is not going to significantly impact our business model,” says Bertrand Carrez, head of its real estate debt strategy. “Amundi will keep originating mainly from and beside arranging banks. They are involving us more and more early in the process of structuring and negotiation with the borrower, so we are indirectly part of discussions and we control the deal’s final economics. Except for small loans, we prefer partnering with banks, rather than competing against them. In this way, we preserve our dealflow from them.”
Bank lenders are not expected to dramatically lose market share to debt fund boutiques. However, market players say France’s real estate debt market is likely to become more liquid on the back of the new legislation.
According to Murciani: “Debt funds’ role will now become more obvious and permanent when filling gaps which bank lenders have left open, such as lending to less institutional, domestic property companies; transitional and non-income producing properties; and up-and-coming asset classes.”
Key points of the law
■ The legislation, introduced in October 2017 and passed in November 2018, allows organismes de financement – roughly translated as funding vehicles – to grant loans
■ The definition encompasses investment funds including securitisation vehicles and the newly created ‘specialised financing vehicles’