Brookfield sees potential in UK debt

The Canadian giant’s move into European lending demonstrates the allure of the region’s property debt.

Brookfield Asset Management, the Toronto-based alternative asset manager, is no stranger to real estate lending, having issued debt in North America across a series of funds. Its decision to allocate a chunk of its latest debt fund to Europe – focusing on the UK – is further evidence of non-traditional debt providers seeing the value of lending in European markets.

Brookfield is planning to lend in the UK through its fifth real estate debt fund, which closed on $3 billion in mid-November, making it the largest real estate debt fund closed in 2017.

Through the fund – Brookfield Real Estate Finance V – the firm can lend up to 20 percent outside the US, with the UK selected as its primary target within Europe. Brookfield has invested heavily in London, both as a direct buyer of property and as the developer of schemes including the 100 Bishopsgate office tower and its London Wall Place JV with fellow Canadian Oxford Properties.

“This will be our initial foray into this market from a lending perspective,” says Brookfield managing partner Andrea Balkan, who oversees the BREF fund series. The asset manager, with $38 billion of assets under management in Europe, could deploy its total $600 million allocation in the UK “if the opportunity presents itself”, Balkan notes.

Brookfield turns to lending in the UK against a backdrop of positive sentiment towards investing in debt. Given the prolonged stage of the property cycle, debt is increasingly seen as a defensive way to access property returns – a trend highlighted by the latest Emerging Trends in Real Estate Europe survey from real estate industry body the Urban Land Institute and consultancy giant PwC.

“You can generate great income return while protecting your capital and seeing how markets play out,” says one of the fund managers that took part in the

Balkan explains that investors are increasingly channelling their allocations into private debt as an asset class. “We have seen really strong interest in mezzanine debt from investors globally as they are attracted by a really good risk-adjusted return,” she says.

The growing interest in private real estate debt as an asset class is evidenced by the surge of capital raised for European real estate debt funds. Capital raised in the first nine months of 2017 surpassed last year’s total, reaching €5.3 billion, according to Real Estate Capital data.

The latest De Montfort University report, meanwhile, shows that the so-called ‘other’ non-bank lenders – predominantly debt funds – was the only group to increase UK origination in the first half of the year, by 9 percent from the previous six months.

Brookfield is already working on its first deal in the London office sector, despite a squeezed UK loan market that keeps posting decreasing volumes since the UK voted to leave the EU. In the first six months of the year, new loan originations fell by 24 percent to £17.6 billion (€19.7 billion), which followed a 17 percent drop in lending between 2015 and 2016, according the De Montfort University report.

“The exodus from the UK market of many of the traditional lenders provides a very good opportunity for us. Historically, Brookfield has taken a little bit of a contrarian view: when the herd is moving in one direction we’ll move in a different direction,” Balkan argues.

Through its new fund, Brookfield will continue to execute the same value-added strategy as previous funds in the series, which primarily focuses on originating whole loans for well-located real estate assets, syndicating the senior loan to a third party and holding the mezzanine tranche for the fund.

The fund can invest anywhere in the UK, although its focus will be on London. With no constraint in terms of asset class, Brookfield aims to provide whole loans of around £100 million and retain between £20 million and £50 million. The loans’ margins will be adjusted to risk levels, with a loan-to-value ratio of up to 80 percent, Balkan explains.

Brookfield has set a four-year investment period for BREF V – a year longer than those of the previous funds in the series. The firm will collect a 1.4 percent management fee on invested capital and 15 percent carried interest above a 6 percent preferred return, with a 50-50 catch-up, according to a June fund presentation from RSIC. The fund has a gross return target of 12 percent to 13 percent and a net return target of 9 percent to 10 percent, the RSIC documents said.

“From a lending perspective, we’re very comfortable with the UK market, as we have a large business here that makes us comfortable with all due diligence of real estate,” Balkan says.

“Our physical presence in the UK and our large real estate holdings in the country really provide us with the knowledge that we think we need to make the right lending decisions,” she adds.