With a €600 million fund close in December, GreenOak Real Estate’s London-based credit business has joined the select group of alternative property lenders targeting continental Europe’s recovering markets.
After raising two UK-focused debt funds in 2014 and 2017, the GreenOak Europe Secured Lending vehicle heralds a geographic shift in the global investment manager’s debt strategy, and a step-change in its lending ambitions.
Jim Blakemore, the former real estate banker running the strategy, admits his personal transformation to private debt fund manager was not in the playbook. Initially a real estate lawyer in New York, he was seconded to investment bank Lehman Brothers and became an employee in 1997, beginning a 15-year tenure at the now-defunct Wall Street bank.
After making the move to London in 2000, he became European head of the bank’s Global Real Estate Group in 2004, overseeing a team of more than 100, writing loans and structuring CMBS deals. The bank’s 2008 collapse, he admits, “came as a shock” and prompted a four-year work-out stint with what remained of the firm. It also prompted a career rethink.
“I thought I’d end my career at Lehman,” recalls Blakemore. “I had one job before Lehman and I’ve never chased the next job. I liked it there, I had room to grow, and maybe I’m a risk-averse person,” he laughs.
Like other ex-real estate bankers, the private debt world beckoned. After considering raising his own fund, he received an offer in 2012 to join the privately owned GreenOak, which was founded two years earlier by former Morgan Stanley Real Estate alumni John Carrafiell, Sonny Kalsi and Fred Schmidt.
“I’d known John for a long time and I wanted to work with people who were some of the smartest in property,” says Blakemore. “Although I’m not an equity guy, I enjoy being around people in the equity flow.”
The core of GreenOak’s credit unit is formed from Blakemore’s Lehman team and includes former bankers Chris Taylor and Manja Stueck. Although some of the people are the same, the nature of the lending is very different. “What I really like about what we’re doing now is the slower pace of the market,” he says. “We’ve closed loans in 10 days, but I’ve never felt the pressure to close deals.”
The continental European strategy significantly expands GreenOak’s lending scope. The debt team’s initial focus was a work-out mandate bought from Lehman, before it hit the fundraising trail to raise fresh capital for lending in the UK.
“We were new to being a fund manager, so we wanted to be very focused and the UK was further along in its recovery than Europe,” says Blakemore.
By December’s final close, the Europe fund was 60 percent deployed through 12 loans in Germany, the Netherlands and Ireland.
Now is the time to target the continent, Blakemore says: “There’s growth in Europe, creating more space for value lending. Investors in the Netherlands, for example, are seeing GDP increase dramatically and no development for a long time, so buying a vacant office, putting money into it and finding a tenant seems like a viable business plan. That wasn’t the case three years ago. We think there’s more scope for lending to business plans in continental Europe than in the UK, as investors are uncertain on where the UK is headed due to Brexit.”
Sourcing deals, however, can be a challenge. Blakemore says that GreenOak did not commit to a lending deal in 2017 before July, with the expectations of some UK property owners still requiring a “Brexit reset” and political factors such as the Dutch and German elections prompting caution in continental Europe. Investment prospects in early 2018, however, look far healthier.
“Europe’s exciting, because the real estate market trend had been distress for several years and now we are seeing genuine growth,” he says. “What’s a little tricky, from a lender perspective, is that some of these properties were 50 percent below market value a year ago but values have risen, so that’s something to be cautious about.”
While Spain has featured on GreenOak’s agenda from an equity point of view, lending is more likely to be focused on northern Europe, including Germany, France, the Netherlands and the Nordics. Local entrepreneurs as well as international private equity firms are the typical clients.
“The challenge from a credit point of view is whether things get too exciting in Europe,” suggests Blakemore. “Some bad assets might sell for more than they’re worth. Euphoria attracts capital and later players might not be as sophisticated as the early people in the market. If the equity is overpaying, that’s a problem.”
GreenOak has tapped growing demand from institutional investors to allocate capital to European private real estate debt. Investors in the fund came mainly from the UK, continental Europe and Asia, the latter group increasingly noted as investors in European vehicles due to the lack of a private debt market in their home region.
Fundraising was easier for this, GreenOak’s third debt vehicle, Blakemore comments. “Investors were pleased to see we had a track record. The challenge for investors in the early days was there were a few established players raising debt funds, including AXA and Prudential, and then new funds such as DRC, Renshaw Bay and us. Today, it’s much clearer who are the winners in the debt fund space, so in some ways it makes it easier to raise as we have investor support. I wouldn’t want to start from scratch today.”
Across its debt funds, GreenOak generates returns of between 7 percent and 9 percent for its investors. In certain deals, IRR can be up to 13 percent, while loan margins typically sit within 400 to 600 basis points. Pricing reflects that GreenOak’s range of products – senior, mezzanine, whole loan, bridging – are written against transitional properties.
In the US, he points out, the real estate banking sector is far healthier than in Europe, yet private debt remains a relevant part of the market. “Investors in European private debt are arguably paid more than they should be. Over time, pricing may come in as competition increases, but it’s still an attractive asset class.”
The GreenOak debt team’s backstory as the core of a large-scale investment bank lending business and then a work-out unit in the wake of the crisis means it is ingrained in the European real estate debt scene.
Richard Jackson, managing co-founder of investment manager Apache Capital, has borrowed from GreenOak on three occasions. The first loan funded the purchase of a site in the London satellite town of Kingston: “It was a semi-distressed situation with some planning risk and we needed to close the transaction quickly. It took just three weeks to close the deal and come to a balanced, fair transaction with Greenoak,” he recalls.
“It’s refreshing to deal with a firm similar to ours, but on the debt side,” he adds. “You are able to deal with the decision-makers and have an open and transparent conversation. They don’t hide behind a credit committee and have always delivered on what they promise.”
Keith Breslauer, also a former Lehman employee before he formed Patron Capital in 1999, has known members of the GreenOak debt team for several years. To be hired by Lehman’s liquidator for the workout and then emerge with a new debt business demonstrates the team’s credibility in the market, he says.
“We also went through a tough 2008, so I have a lot of respect for people who have come through, dealt with historical issues and recovered,” he says. “The crucial question is how will lenders cope with the next crisis? A guy like Jim has the experience that others in the debt market lack.”
With its roots in the Lehman Brothers story, the GreenOak lending team’s background is inevitably linked with the highest-profile bankruptcy of the global financial crisis. Lehman Brothers, Blakemore says, was a “really nice, collegial” place to work. Asked about lending practises at the height of the bank’s lending, leading up to 2007, he is quick to defend his and his team’s track record.
“Lehman had too much CRE exposure for its balance sheet size. That was its biggest issue and it was a global issue. No bank can survive a run on the bank, and other organisations had a lot of illiquid assets, but we clearly had too much CRE exposure.”
The property business was “enormously profitable” for the firm, Blakemore explains, with senior management keen to grow it, leading to a lot of transactions. “But we never embraced the ‘if the ratings agencies are OK with it and we can sell it, then just do it’ mentality, which a lot of people did. As a bank, Lehman was subject to mark-to-market accounting, but the performance of the loans that I wrote held up. I wouldn’t have raised this money if I didn’t have a good track record,” he adds.
Following the bankruptcy, Blakemore and current GreenOak colleagues remained at Lehman in a work-out role. “I felt responsible for the team and the book and wanted to see it out.”
A major lesson from the crisis, Blakemore says, is that focus on the quality and sustainability of the underlying property is essential. “It is important to ask whether someone will lend on an asset five, 10, even 20 years from now. Every retail centre presents a risk, for instance, and we’d also be worried about offices outside sustainable locations.”
In his banking days, Blakemore ran his own lending book and managed that of a large team. In his debt fund role, close oversight of the whole book is possible, he explains: “I trust the team, but I verify everything. The product we have here is a much better product – more bespoke. we don’t care what the rating agencies say, we care about using our knowledge to focus solely on return of capital.”
Life at a debt fund in 2018 is vastly different from that at an investment bank in 2008, Blakemore adds: “Pricing is obviously very different. In general, we are lending on less-stabilised assets and so the risk we are taking is property business-plan risk, which was penalised under the rating agencies model. Our capital dictates the risk, but we like the risk we are taking because the price of core assets is at an all-time high and it doesn’t take much of a hiccup to create issues.”
The pace of the market for a private debt fund manager also allows for additional scrutiny of the underlying real estate, he adds: “I see every asset. That can be a pain in the neck, but I want to see all the properties. If the borrower needs the loan in a week, we can do that, but we won’t take shortcuts to make it happen.”
Real estate banking has changed for the better since the crisis, Blakemore says, with regulation a positive for the industry. But he argues that the rise of the private debt fund model is a benefit to the property lending space.
“Real estate is illiquid,” he says, “and it is arguably a more natural asset to be held by pension funds and insurers, which are less mark-to-market oriented than commercial banks.”