DRC Savills IM returns to fundraising trail now ‘volatility has diminished’

DRC Savills Investment Management is raising capital for a new European debt vehicle as the firm believes volatility has subsided, in spite of the likelihood of near-term interest rate rises, said managing partner Dale Lattanzio.

In an interview with Real Estate Capital Europe, Lattanzio said: “We have been waiting for this to play through but what we are seeing now is credit spreads stabilising and coming down a little bit.

“The stock market has recovered slightly from its lows. Inflation looks like it is being tempered by the activity of the central banks and the [economic] news coming from the US is encouraging,” he explained, adding: “The combination of knowns is starting to outweigh the combination of unknowns.”

Lattanzio’s optimism comes as ECB president Christine Lagarde warns the financial markets that the European Central Bank is determined to “stay the course”, signalling that further big interest rate rises lay ahead.

But Lattanzio is sanguine over further rate rises, arguing that this prospect is unlikely to stymie market activity as “capital values decline across different regions and asset classes at different speeds”.

It is likely that DRC Savills IM will be part of that increased activity, as Lattanzio says that the business expects to announce a first close of fundraising for a new vehicle in the coming weeks – though he declined to give further details.

Lattanzio’s evidence that confidence is growing is that, in contrast to last September – when the then-UK prime minister Liz Truss’s promise of billions of unfunded tax cuts unsettled financial markets everywhere – it is now more possible to predict where rates will eventually peak.

“The point at which interest rates will peak is less important to me than the fact we’re further into the process than we were. This is because we can now more accurately predict a range of outcomes. Yes, we can argue about where rates will end up, if that will be five or five and a half percent, for instance. But at the beginning of this we had a long way to go. Now we can see the peak possibly taking place over the next six to 12 months. That will give the market some comfort,” he said.

“There is definitely more optimism because volatility has diminished. This is what capital needs – whether it is debt or equity. Liquidity is created when the markets are less volatile because you can predict movements, when you are not worried about the unforeseen.”

DRC Savills IM, which is the real estate lending platform of Savills Investment Management, has been affected by the market inertia of recent months judging by its latest lending figures. During 2022, the business lent €297 million during the first nine months – less than half of the €739 million it loaned during the previous year.

Given that restraint, it is likely that DRC Savills IM will have capital to lend this year, aside from any new fundraising. In February 2021 it announced the final close of its European Real Estate Debt IV fund, having secured €600 million of commitments for a strategy targeting IRRs between ten and 12 percent in the UK, Netherlands, Germany, France, Spain and Italy.

Retrofitting cap-ex

Offices in need of environmental upgrades are of particular interest, says Lattanzio. “The amount of cap-ex required in the office market is building more quickly and may be bigger than the market had anticipated,” he explained. “The need for sustainable buildings has accelerated over the last couple of years, especially from occupiers, and this has had huge knock-on effects.

“As a lender, what we like is certain elements of the office sector, we like assets that are well-located, have a good sponsor and a good cap-ex plan in place. What we don’t like is poor locations, poor plans and not enough money being invested to get an asset to the right level because most demand out there for offices is around the higher end of the sustainability spectrum. You need a high standard for occupiers to be interested.”

DRC Savills IM’s recent financings have included a mezzanine loan for UK-based Victory Group’s €767 million purchase of Dutch bank ABN AMRO’s 950,000 square foot head office in Amsterdam, backing what was understood to be the Netherlands’ largest single-asset sale to date at the time. It also finance a portfolio of 21 Spanish supermarket assets owned by Blackrock Capital and a €30 million refinance of a portfolio of Barcelona residential assets.