LaSalle: Investors expect 2020 to be a good vintage for RE debt

Following the €435m first close of its latest credit vehicle, the manager’s debt experts discuss fundraising in the time of covid-19.

On 5 October, property manager LaSalle Investment Management announced the €435 million first close of the fourth vehicle in its flagship European mezzanine debt fund series.

In October 2019, Real Estate Capital revealed that LaSalle was targeting €1 billion in total for LaSalle Real Estate Debt Strategies IV, with a target return of 8-11 percent.

Through the fund, LaSalle seeks lending opportunities in western Europe, including whole loan, capex and development financing.

Real Estate Capital caught up with Amy Klein Aznar, head of the firm’s debt and special situations business, and Ali Imraan, managing director in the team and LREDS IV’s fund manager, to discuss the fundraising.

How did the pandemic affect your fundraising process?

Amy Klein Aznar
Klein Aznar: Some investors increased commitments during due diligence

Amy Klein Aznar: We began the first close process on target, so investors which had begun due diligence pre-pandemic were able to close during the lockdown. There were a lot of Zoom calls, which everybody seems to be getting more used to. It was more difficult to connect with people, but, clearly, investors were able to look at the performance of our previous funds to understand the dynamics of the strategy.

How are investors reacting to the covid-19 crisis?

AKA: Some increased their commitments during the due diligence process. There is a recognition that real estate debt has, so far, proved to be a resilient strategy and should remain so during a crisis like this. We saw the same dynamics after the 2007-08 global financial crisis, with investors recognising that traditional lenders were pulling back, creating new lending opportunities. There is a feeling among investors that this will be a good vintage for real estate debt.

Ali Imraan: Several investors in the market have been committing to real estate debt strategies for several years. Debt fund managers like us have raised multiple funds, so investors have seen the cash-on-cash returns these strategies deliver. But it is fair to say that, when markets are more volatile, a flight to safety becomes more acute. Real estate debt provides a loan-to-value haircut compared with equity, so is more defensive as a strategy.

We have noticed a trend towards investors making larger commitments than in previous funds in the series. Investors were more inclined to take larger tickets, which seems to be a theme across the global real estate fundraising market.

Was there a change in the profile of investors, compared with the third LREDS fund?

AKA: There was a significant number of new investors to the series in the first close. But our investor base has always had an institutional bias, so we continued to see the strongest demand from pension funds and insurance companies. By geography, the mix was similar to previous funds, with mostly European and Asian investors.

Ali Imraan
Imraan: More favourable risk-adjusted returns are on offer in the market

AI: US investors tend to favour domestic strategies for the core-plus/value-add returns LREDS IV is targeting. They are more likely to commit to international strategies with higher risk, higher return profiles. The risk/return profile we are targeting usually appeals to European and Asian investors.

How is the pandemic changing your lending parameters?

AI: We haven’t changed our returns target, but we believe we can achieve more favourable risk-adjusted returns. Deals in the pipeline have more favourable attachment points for us. The senior lending market has retrenched, so whereas senior debt was up to 60 percent loan-to-value, it is now more like 55 percent. Our mezzanine positions remain a similar size, but it means we are taking less risk than pre-crisis for the same return.

When do you expect a final close?

AKA: We typically have a 12-month period between first and final close, but I wouldn’t be surprised if we were ahead of that, given our last two funds were oversubscribed and we already have investors in due diligence.