Until relatively recently, GWM Group would have been an unlikely candidate to provide senior finance in the European real estate sector.
The London-headquartered company was founded in 2000 as a wealth manager for Italian family offices – hence its name being an acronym for Global Wealth Management. It became an independent asset manager in 2010. In real estate debt, much of its activity in the last decade has involved high-yielding activities, including buying non-performing loans in Italy – the home country of its partners and the scene of much of its business.
In 2019, it arranged and invested, alongside US manager PIMCO, in the €1.3 billion Project Sandokan 1 NPL portfolio from Italian bank UniCredit. It followed this up in 2020 by investing in a €2 billion successor portfolio, Sandokan 2, from the same seller.
Outside Italy, it partnered with investor Helios Capital for an £85 million (€99 million) speculative development financing of the Aldgate Tower office scheme in London for an Irish sponsor in 2013. The deal, which included preferred equity, was a rare example of speculative development finance in the UK capital at the time.
Despite its opportunistic and high-yielding real estate lending pedigree, GWM is turning its attention to senior real estate loans. In August 2020, it secured a €75 million commitment from an Italian pension for its Commercial Real Estate Debt Opportunities fund. The pandemic slowed its fundraising, but it now plans to seek commitments to bring the closed-end fund to €500 million.
According to Gennaro Giordano, managing partner with the firm, the strategy is designed to cater for mid-market sponsors seeking loans with a minimum size of €20 million against transitional properties – too small for investment banks, but too complex for commercial banks.
“It is a new product for GWM,” Giordano tells Real Estate Capital. “We have been more active in opportunistic real estate equity and lending, as well as distressed deals. But we saw a big gap, especially in continental Europe, for financing for mid-cap borrowers and projects.”
The strategy is also about diversification. “As a company, we want to increase the range of products we offer to our investors,” he says. “Pre-covid, we had already noticed the trend in the banking sector, but covid has made lending more difficult across the banking system, so our conviction about this is even stronger now.”
In December 2020, GWM used the CREDO fund to provide a circa €70 million senior loan to finance the acquisition and development of a portfolio of prime logistics properties in the Milan area for a fund managed by Savills and owned by private equity firm Angelo, Gordon & Co, and logistics property company Bell Real Estate. The borrower was advised by London-based Conduit Real Estate.
CREDO is a closed-end vehicle with an evergreen investment period, meaning GWM will recycle investors’ capital to continue to find lending opportunities until investors opt out. Investors will have the option of allocating capital to levered and unlevered sleeves of the fund. The loan-on-loan leverage for the levered sleeve will be up to 60 percent.
By targeting transitional real estate, GWM is targeting margins of 300-600bps, depending on risk, leverage and jurisdiction. “We will provide leverage up to 65-70 percent which, especially since the covid crisis began, is not easy for borrowers to find,” says Giordano. “If you go to a traditional commercial bank with a lease-up story, it has become more difficult to get money.”
Across the fund, GWM is targeting an 8 percent return for the levered sleeve. “This represents a great risk-adjusted return, with a premium to equivalent fixed-rate income products in the market such as CMBS or syndicated loans,” he adds.
Arturo De Visdomini, a former investment banker who joined GWM in 2019 to lead the efforts to launch CREDO, says the fund has around €200 million of capital at its disposal now, including leverage. “We are approaching this with the mindset of a private equity sponsor, which means we are more flexible than a traditional lender,” he explains.
“The CREDO fund aims at offering the sophistication and speed of execution typical of investment banks, but on a smaller scale, positioning itself among alternative lenders in the space between opportunistic lenders, such as US managers targeting double-digit returns, and insurers providing senior debt on core, plain vanilla assets.”
CREDO has a pan-European investment remit. GWM will be looking for lending opportunities in Italy, where the fund has made its first loans, and in the UK, France, Spain and the Netherlands. Germany will also be on its radar.
De Visdomini says GWM will consider most asset classes for the fund: “Of course, retail and hospitality are areas we look at with extreme caution. We like logistics, but also residential and offices, with caution.”
He adds that GWM has spoken “selectively” with potential investors for the next stage of its fundraising: “We sense a lot of appetite, more than ever, for debt strategies, in particular from insurance and pension funds. They see the relative value of a defensive strategy at this point in the cycle. It’s a no-brainer.”
Despite having branched out into senior lending, GWM continues to look for opportunistic and distressed real estate debt transactions.
The firm continues to deploy its €500 million Italian Real Estate Special Situations 2 fund, which closed in 2019, through which it purchases NPLs and provides special situations debt and equity. A third fund in the series is likely to be raised in the second half of 2021.
Giordano says the strategy’s focus is likely to spread from Italy, where the bulk of investments have been made so far, including the two loan portfolios from UniCredit. However, he adds that GWM will continue to look for Italian opportunities: “There will still be a lot to do in Italy.”
Giordano does not expect there to be a wave of distressed real estate on the scale of what was seen following the 2007-08 financial crisis. However, he does expect an increase in loan defaults and situations where emergency capital is required.
“Once government support is removed across Europe, there will be a need for new capital to restructure situations,” he says. “We expect to see distress in leisure hotels, but also business hotels as people travel less and for longer. There is still a lot of pain to come in retail, and institutional investors are still very selective on where to put capital into it. However, some retail will survive and generate stable income.”
Giordano also expects distress in the office sector, particularly for “tier-two” assets that do not comply with investors’ ESG requirements. “We will see this particularly in cities such as London, which are more exposed to commuting and where work-from-home will impact the type and size of office space required by occupiers.”
He adds that opportunities to invest capital in distressed situations are likely to come from the European commercial mortgage-backed securities market: “The first situations to come to the market will be from CMBS deals, because some retail- and office-backed CMBS will be struggling. It is still early, but, at some point, the senior tranche will need to be repaid and there will be forced sales.”
The covid-19 crisis has had a significant impact on the provision of debt capital in Europe’s real estate markets, prompting traditional lenders to minimise risk, and encouraging alternative lenders to move into new parts of the market. For GWM, senior lending has become an attractive prospect. However, as a firm with experience in opportunistic debt investing, GWM is unlikely to let its attention stray from potential distress.