Allianz Real Estate is broadening the scope of its debt business as it aims to add higher-return lending, including development finance, to its existing senior loans strategy, Real Estate Capital can reveal.
The German insurance giant, which entered the property lending market in 2011 as a provider of senior debt to core properties, has approved a supplementary lending mandate to invest in “enhanced products, including development loans”, according to the firm’s European head of debt, Roland Fuchs.
Lending volumes provided through the new strategy could account for around 20 percent of Allianz’s annual European lending, with the insurer typically growing its debt portfolio by as much as €2 billion per year. Allianz is understood to be close to completing its first deal through the strategy.
Development loans, which could range from supporting repositioning and refurbishment of assets to ground-up construction, are likely to comprise most business done through the new mandate, Fuchs said. However, the mandate – through which it will invest discretionary capital provided by 15 in-house insurance companies – gives the firm the capacity to provide stretched senior and even junior loans, up to around 75 percent loan-to-value.
“The vast majority of our loan book – around 80 percent – will remain senior investment loans, but because of the lack of availability of investment product there are more development opportunities coming up in Europe,” Fuchs said.
Lending margins for prime development loans could command a 50-100 basis points premium to senior investment loans, he added. The office sector will be the primary focus of the strategy, through which Allianz expects to write development loans ranging in size from €100 million to €200 million. The insurer will target club deals alongside banks.
The new strategy brings Allianz Real Estate’s debt business in line with the equity side of its activities, in which it invests in both core and value-add property. Allianz’s equity arm already invests in core office projects in their construction phase, including the prime building The Icon in Vienna, acquired by the insurer for €500 million, the Kap West in Munich and the new ENI headquarters in Milan.
“We must like an opportunity from an equity perspective in order to be prepared to finance it through debt,” Fuchs said. “We have a €40 billion equity portfolio, so we know which markets we are prepared to take letting risk in. In cases where we would be prepared to take value-add equity risk, we can now also talk to clients about development loans.”
Allianz’s shift towards development finance reflects a willingness among core investors and lenders in Europe to target investments higher up the risk curve in a bid to source deals and enhance profitability in the late-cycle European property market.
“Margins have compressed in Europe because of higher competition, banks have more liquidity now and there is a higher number of alternative lenders in the market. At the same time, availability of core assets is limited. We are now looking at transitional assets which provide higher margins,” said one German banker focused on senior lending.
Taking letting risk by providing development finance to prime schemes is not a huge leap from providing investment finance to schemes which will face refinancing risk in three to five years-time, Fuchs argued: “This is not so much a move up the risk curve.”
Allianz grew its senior lending activity during 2017, writing €3.7 billion of new loans, of which €1.9 billion were deployed in the UK, Ireland, Spain, Italy, Austria, the Czech Republic and the Netherlands – in addition to Germany and France, its core markets. The remainder were provided in the US market.