Insurers do not want to miss the window of opportunity created by institutional investors’ demand for real estate credit, particularly while regulation limits banks’ ability to lend against property.
An example of this trend is the latest move by Generali Real Estate, the Italian insurer’s property management arm, which in May launched its debut European property debt fund. Generali’s insurance companies provided €1 billion, which is expected to be supplemented with €500 million of third-party capital over the next two years.
Generali is part of a growing cohort of insurance companies raising outside money for real estate credit strategies. Last year, Allianz Real Estate, the property business of the German insurance company, launched a centralised property debt platform. It is now raising third-party capital for the platform, having already committed €1 billion of its own money.
Insurers are aware of the growing demand for real estate lending strategies from institutions, and particularly from those that are unable to originate the debt themselves. These investors, particularly smaller insurers and pensions, have typically focused their debt investments on conventional bonds for low-risk, steady yields. Since the global financial crisis, however, bonds have been under pressure after central banks flooded the financial system with cheap money to stimulate investment.
In their hunt for yield, institutions have turned to alternative asset classes, including real estate debt, which offers regular income with the added benefit of the borrower’s equity cushion. Returns for senior property credit strategies, typically in the region of 2-2.5 percent, offer a premium over fixed-income products such as BBB bonds issued by REITs, which tend to generate returns of around 60 basis points. Real estate debt also provides investors with the benefits of diversification and low volatility.
Meanwhile, the banking sector’s need to de-lever, owing to tighter regulation, is creating a market opportunity that is being exploited not only by insurers, but by a wider spectrum of alternative lenders. Non-bank lenders’ share of the European real estate lending market has steadily increased this decade. In the UK, for instance, data from the City University of London’s Cass Business School show that alternative lenders accounted for 26 percent of the market in 2018, up from 9 percent in 2012.
Insurers such as Generali are capitalising on these market dynamics by tapping third-party investors for their property debt strategies. External capital increases insurers’ income through fees, while boosting the scale of their platforms. Fundraising, however, might become challenging, as new players compete in a European market already dominated by organisations with established track records. Real Estate Capital data show that the top five pan-European real estate debt funds to close in 2018 accounted for 59.7 percent of the $6.28 billion raised across the continent last year.
New entrants will therefore be more likely to succeed if they have a solid presence in real estate equity markets and longstanding relationships in the industry. With €30 billion of assets under management, Generali will take advantage of such a track record. The firm’s goal is to have as much as €3 billion of exposure to commercial real estate debt within the next three years. If that is achieved, it would provide evidence of continued institutional appetite for this most nascent of bond surrogates. It would also illustrate the increasing acceptance of how reliable an income generator the asset class has become.
Keep an eye out for our upcoming interview with Generali’s head of debt investments, Nunzio Laurenziello, in which we explore why the insurer became a lender.
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