Why GAM wants to lend in Europe’s regional cities

The asset manager has already raised £200m for its second real estate lending vehicle, providing mid-market whole and mezzanine loans in the UK and Western Europe.

For its second real estate debt fund – for which it has raised £200 million (€224 million) so far – Swiss asset manager GAM is taking aim at regional cities across target European markets, rather than focusing on major cities such as London or Dublin.

The reason, the firm’s investment director for real estate debt finance, Jon Rickert, told Real Estate Capital, is to build downside protection into its lending portfolio. Property values in many of Europe’s capital cities are high, making GAM “fairly cautious” about such locations, he explained, while prices in regional cities have been slower to recover during this cycle and therefore are less likely to fall steeply if there is a correction across European property markets.

“In most of the regional cities asset values haven’t recovered to the levels seen in the prior peak, which suggests a healthy amount of protection yet if values were to fall again,” Rickert said, adding that the opportunity in regional cities is also attractive because of less lender competition.

GAM’s second property vehicle, through which it will provide mid-market whole loans and mezzanine debt, has raised capital mainly from pension funds in the UK, but also across Europe, Rickert said.

Rickert declined to disclose the fundraising target of the fund, but said he expected a final close before Q1 2019. In March last year, Real Estate Capital reported that the fund was aiming to raise between £300 million and £400 million by its final close, in line with the vehicle’s maiden fund, which closed on £356 million in early 2015.

“This fund is naturally suited to investors who are a bit more cautious around their direct property investments and seeking a stable income,” Rickert noted. “Demand for funds like ours tends to be from pension funds who generally don’t find senior loans attractive.”

Rickert did not disclose the targeted return of the fund, although Real Estate Capital reported last year the fund would aim for a net return of around 10 percent. While more conservative senior debt provides returns of around 2.5 percent, whole and mezzanine loan investment strategies generally target interest income distributions to investors of 6-8 percent per year; and a total return of 8-10 percent, according to a GAM’s insight report from June.

Loans in excess of 60 percent loan-to-value are “highly demanded” as a result of banks’ tightening lending standards following the global financial crisis, which has created a “very fertile ground” for non-bank lenders in this space, Rickert noted.

“We have seen a resurgence in bank lending, but at a very conservative levels, that is, only senior lending. While banks are lending between 50 and 55 percent LTV, there’s borrower demand for loans above 60 percent LTV,” he explained.

The fund has already a “robust pipeline” of deals in the UK, as well as in Ireland, Spain, Benelux and Germany, Rickert said. The vehicle will typically provide loans of under £50 million, ranging from three to five years. The firm’s first fund, fully deployed across 25 investments, had an average loan-to-value ratio of around 71 percent