M&G Investments: Raising and deploying amid covid-19

John Barakat, head of real estate finance at M&G Investments, winner of Alternative Lender of the Year in both the UK and Germany, discusses lending market conditions in 2020 and beyond.

This article is sponsored by M&G Investments

How did you compete for business in 2020?

John Barakat
John Barakat

One of our strengths is that we can do multi-hundred-million-pound investments that we hold to maturity on our own book. That scale means borrowers are sometimes prepared to pay a little extra for being able to source all their debt from a one-stop, hold-to-maturity lender and that generates extra returns for our investors.

During last year, we had investors expand the remit of their commitments to our funds, giving us additional capital and a wider ‘hunting licence’. That meant we could look for bigger opportunities across different geographies and sectors. We started 2020 with our first US loan. Having significant pools of capital available in a market where many lenders were reining in their risk appetite resulted in better value. We invested a lot of capital after August, making 2020 our second most active year.

What challenges did you face due to the pandemic?

It meant we had to turn inwards and triage the loan book, which took up the middle part of the year. Inevitably, we had some borrowers who could not collect their full rent and needed some attention.

We took an approach where we tried to be both thoughtful of the pressure borrowers were under and at the same time protective of our investors – it was a balancing act. It also constrained our ability to win capital from new investors. Having a 12-year track record helps investors understand we hope to be strong stewards of their capital.

The nature of what we did certainly looked different to pre-pandemic. We took less speculative risk on transitional assets, but also made a development loan in Q4. We put capital in the office sector, but in assets with long-term income from high-grade tenants.

What does the future hold for the industry?

In a somewhat more stressed environment, there is an opportunity for producing higher returns for investors as the requirements for recapitalisations could become more numerous. We might also invest in new geographies, though we expect to be most active in the places we are familiar with. And we hope to start the year with new client mandates.

In my opinion, the market has still not priced in the potential long-term negative impacts from the pandemic. Economies have been supported by massive fiscal stimulus that cannot be sustained indefinitely. The possible shock to the economic environment is real. However, real estate debt continues to be a favoured asset class.

Investors remain attracted to the excess yield and reduced risk on offer and I think it will remain a favoured strategy for 2021.