An increasing number of investors regard the business of buying commercial property as a global pursuit. According to Cushman & Wakefield, a record $1.75 trillion of commercial real estate changed hands in 2018, of which $405 billion involved buyers crossing borders, a 10.7 percent rise on the previous year.
Low interest rates in many countries have prompted institutional investors to shift capital from fixed-income products into more rewarding asset classes. Property has been a major beneficiary, and huge reserves of capital from across Europe, North America and Asia-Pacific have been funnelled into real estate equity and debt strategies.
Emmanuel Verhoosel, global head of real estate and hospitality at French corporate and investment bank Natixis, believes real estate banking should reflect the global nature of capital flows. “We can’t simply focus this business on Europe,” Verhoosel tells Real Estate Capital. “The globalisation of the real estate market is accelerating. Our clients look at property from a global perspective, so we need to adapt to that.”
On a net basis, Nataxis data show cross-border real estate investment activity has increased from $32 billion in 2009 to $155 billion last year. North American and European firms, Verhoosel says, are the largest exporters of this capital, though he notes Asian investors are playing a growing role in worldwide capital flows.
“Regional diversification has been key for some real estate companies to lock-in higher returns,” he says. “Also, investors are becoming bigger. The proportion of international investment by these large players is increasing.”
The former JPMorgan and ING banker was hired by Natixis last September as part of its plan to restructure its activities. The bank has been moving from a product-based approach – which included the bank being arranged into divisions including capital markets and M&A advisory – to divisions focusing on four sectors: infrastructure, energy and natural resources, aviation, and real estate and hospitality.
“We are competitive in the market worldwide because we operate a completely international distribution strategy,” he says. “We know where, around the world, are the pockets of interest for each type of transaction we undertake, whether that be European, American or Asian money.”
The engine of this strategy is an originate-to-distribute model. This has already enabled the bank to underwrite a large volume of transactions – the figure for 2018 was in the order of €14 billion – and sell on a large proportion of its credit exposure to capital partners with varying risk appetites.Verhoosel, who is based in the bank’s Paris headquarters, says the rationale is to encourage a change in culture from a transactional to a client-focused approach. It brings a wide range of property sector clients within his remit, including asset managers, listed firms, sovereign wealth funds and family offices. With staff based across seven offices in Europe, the US and Asia-Pacific, the aim is to follow real estate borrower clients into whatever global ‘gateway’ cities they choose to invest.
Natixis backs deal on home turf
In an example of Natixis backing a cross-border acquisition, the bank is financing the Swiss buyer of a Paris office portfolio. At the time of publication, the firm was due to close a 50/50 financing, alongside Swiss Life Holding, of Swiss Life Asset Managers’ €1.7 billion purchase of the portfolio, 90 percent of which is located in Paris’s central business district. The acquisition, from French property company Terreïs, was agreed in February. Natixis will syndicate the debt.
In 2018, Natixis distributed €11 billion of real estate loans to other lenders based in 16 countries. The US, French, German and South Korean markets were its major distribution channels. Around a third was sold to banks and the remainder to other types of financial institution.
Data provider Dealogic ranked Natixis as the number one bookrunner in real estate syndicated finance in the Europe, Middle East and Africa region in 2018. One syndication banker, speaking off-the-record, says the bank is “very strong, by necessity” in the syndication markets, as its business in real estate is predicated on an efficient distribution of its loans. “It is the epitome of an originate-to-distribute bank,” the banker says. “It can do higher-octane deals because it does not hold too much capital.”
In the US, Natixis’s favoured method of distribution is in the commercial mortgage-backed securities market. The bank typically distributes 90 percent of US loans into the country’s liquid CMBS market. The smaller-scale European CMBS market does not currently feature in the bank’s strategy, though Verhoosel says that might change: “Lately, I have seen large pan-European portfolios which may be suitable for CMBS. The market is slowly moving, and we are reassessing the situation.”
By contrast, there is a huge demand from global organisations wishing to participate in syndicated real estate loan deals. A range of banks, private debt fund managers and institutional investors with direct investment strategies are eager to buy European real estate debt in the secondary market.
For loans written in the European real estate market, Natixis typically retains a 25 percent stake on its balance sheet and syndicates the remaining three-quarters. The ability to sell risk on to interested parties allows it to underwrite deals including higher-yielding elements. “We hold only conservative, defensive positions on our book,” explains Verhoosel. “There is not a defined leverage point we are able to underwrite before syndicating a mezzanine piece.” He adds that the bank will typically find a buyer for the mezzanine tranche before underwriting a loan.
Natixis is not the only bank aiming to reshape its real estate businesses along global lines on the back of strong syndication activity. Its clearest competitors are the US investment banks, many of which have large European teams. However, Europe’s larger commercial banks – including French peers Crédit Agricole and BNP Paribas, as well as the larger German Pfandbrief banks and Verhoosel’s former employer ING – also lend across borders.
“We operate like a mix between an investment and a commercial bank,” says Verhoosel. “Like a commercial bank, we are trying to find financing solutions for clients by using our balance sheet. But, like an investment bank, we have a distribution and cross-product model. We look at solutions that often include M&A or capital markets. I have worked in both environments before.”
How Natixis views UK real estate
Paris-headquartered Natixis does not currently have a London-based real estate finance team. However, Verhoosel aims to develop his business unit’s lending activity across the Channel. “We want to be more present in the UK,” he says.
Global clients still have a demand for UK real estate, notwithstanding the political turmoil of Brexit. “They want to be more than opportunistic in the UK and are keen to have the support of a bank they know.”
Verhoosel believes London is an essential element in a network of global cities, alongside other key real estate markets, such as New York and Hong Kong. He argues that the UK’s messy divorce from the EU does not change that objective.
“Whatever the political situation, London will remain one of the largest real estate markets in the world. The uncertainty of Brexit is already partly priced into the market. Any effect will be on short-term liquidity and the market will resume. It is still possible to lend and distribute against London property.”
In the large-ticket, prime part of the market, pricing remains tight. However, Verhoosel notes: “Banks realise they need to comply with Basel regulations and that the cost of their financing will increase, so margins are stabilising. But there is a lot of liquidity from debt funds and insurance companies, which is keeping pricing low.”
Market sources say the real estate syndication market is as strong as it has ever been owing to the volume of investors seeking indirect lending opportunities. Pricing has increased as a result with some saying sub-100 basis points margins are the exception rather than the rule in today’s market.
Verhoosel describes a growing profile of syndication partners. “There are a lot of new debt funds in the market, particularly in the mezzanine finance space. There are also asset managers and insurance companies. We do syndicate debt to other banks, as has been the case for many years, but that represents a lower volume of our distribution now. Non-bank financial institutions are the largest part of our distribution network.”
Natixis’s own asset management arm, Ostrum, and its real estate investment manager subsidiary, AEW, are a case in point. A joint venture between the two firms is targeting €700 million of capital for its third senior European private real estate debt fund.
Asian capital is frequently cited as a key source of liquidity in the real estate financing markets. Verhoosel says the greatest demand from Asian lenders is for the US loans the bank writes, because the US market generates higher yields and returns on investment than Europe.
Asked where he expects the greatest growth in capital allocations to real estate, including debt, Verhoosel answers quickly: Japan.
“It’s the biggest market we are watching,” he says. “There is a huge potential volume of capital as the Japanese pension funds and insurance companies diversify. An increase in allocations from Japan would be a gamechanger for real estate markets globally. We are not seeing much investment yet, but that can change quickly. It will only take one or two firms making the first move.”
On the global stage, REC data show that during 2018, $20.39 billion was raised for real estate debt-specific funds, compared with $39.8 billion in 2017. The same pattern was seen in the European market. However, Verhoosel believes the year to have been a blip in an otherwise positive trend.
“An increase in allocations from Japan would be a gamechanger”
“A lot of capital was raised for real estate debt strategies in 2017. But because the loan market is so competitive, some managers have struggled to deploy, meaning fundraising was down last year. However, private debt fundraising is a trend that will continue. Europe will come to resemble the US, where banks have a much more limited role and insurance companies are more active.”
He adds that regulation will continue to play a role in encouraging a greater diversity of lenders in the global real estate markets. “Banks are facing the latest round of Basel legislation, so they are more likely to operate as arrangers rather than hold vast amounts of debt on their books. There is a place in the long run for insurance companies and other non-bank lenders.”
AlthougJh Verhoosel acknowledges the late-cycle market conditions, he argues real estate will retain its premium over treasury bonds, making it a suitable asset class through which investors can diversify their risk exposure. However, he offers the following caveat: “The prospects for sub-sectors within real estate is a whole other question. It requires examining market fundamentals which, in cases such as retail, are being shaped by societal changes.”
If the ‘originate’ part of the model is to generate the necessary lending volumes, the bank needs to take a view across all sub-sectors and geographies. Competition to write deals is intensifying as non-bank lenders with large sources of capital, such as Blackstone’s private debt business, are competing with banks for big-ticket financing mandates.
The European and North American markets account for the lion’s share of Natixis’s real estate lending activity. The bank has the capacity to lend in Singapore and Hong Kong, though Verhoosel acknowledges that they are competitive markets. It is also exploring opportunities in Australia.
Borrower clients, Verhoosel notes, are becoming more global in outlook and are growing larger portfolios, albeit ones that are often more specialised by asset class than was the case in the past. Property investor clients are also adopting debt strategies
to complement their bricks-and-mortar portfolios.
“In their efforts to grow and become more sector-specialised, clients are undertaking portfolio acquisitions, so there is an opportunity to provide M&A-style advisory services in such deals. We are involved in several large office transactions of this type which are ongoing.”
Verhoosel argues that taking a global approach and tapping into a wide market for syndicated real estate debt ultimately enables lenders to react to changing patterns of sponsor and investor demand. “An originate-to-distribute model allows you to adapt to the market all the time. The focus is always on underwriting the right deals and distributing them to the most appropriate partners, which frees up the balance sheet so you can do the next deal.”
As well as creating the ability to underwrite large volumes of real estate loans, Verhoosel argues there is a prudence to running such a business model. “It helps to keep risk-weighted assets low, making it possible to continue to be active in a downturn.”
Natixis in numbers