Deals done and strategies announced so far this year appear to show that diversification is high on many European real estate lenders’ lists of priorities.
In the banking world, strong competition to finance prime assets is driving diversification – and tightening margins. Germany is the clearest example of this, with banks forced to provide debt for a margin of approximately 1 percent for prime offices, according to CBRE.
German banks have been focusing on geographic diversification, in a bid to find higher pricing, in recent years, so it is not surprising to see that trend continue with MünchenerHyp’s appointment of Thomas Völker, a former senior executive of Helaba. In a newly created position, Völker will lead the expansion of the bank’s domestic and core markets business with international clients, plus the drive to enter new European countries.
Geographic diversification makes sense for banks. The continued strong economic performance across the eurozone means there is business to be had across the continent. The Nordic countries, in particular, are attracting property lenders due to the region’s strong fundamentals and high levels of investor liquidity.
However, tightened regulation limits many banks’ diversification to geographic expansion. Lending to higher-return sectors such as alternatives – hotels, student accommodation, care homes, for example – as well as emerging sectors, can be difficult for many banks, due to increased operational risk.
Alternative and specialist lenders, meanwhile, have more freedom to diversify by sector and lending product. While the private debt fund market in Europe began life largely to provide the mezzanine and high-yield debt offered by banks pre-2007, senior strategies have subsequently been introduced by some as alternative debt providers continue to impinge on traditional banking territory.
Recent deals also show alternative lenders’ appetite for sector diversification. Specialist UK lender Maslow Capital, for instance, has boosted its lending through several residential and student housing deals, capitalising on high street banks’ subdued participation in the development finance market.
Diversification is perhaps most pronounced in the niche lending sector, where firms which began by raising retail money have diversified their funding base – including from institutional sources and investment bank credit lines – allowing them to vary their range of products. LendInvest, a specialist UK debt provider, has reported a year-on-year 33 percent increase in lending volumes in 2017 by broadening its ability to tailor loans to distinct categories of borrowers. In November 2017, US bank Citi provided a warehouse funding facility to LendInvest to back its entry into the UK’s buy-to-let sector, for instance.
The trend will continue into 2018 across key markets. The Real Estate Finance unit of Link Asset Services, which is conducting its second survey of the UK real estate debt market, told Real Estate Capital this week that it expects to see non-bank lender types, including debt funds and peer-to-peer platforms, increase their capacity to offer margins and leverage levels typically associated with senior banks as they expand their presence in a competitive UK market.
With some exceptions, such as Lloyds’ recent financings for the science parks, pubs and development sectors through its Green Lending Initiative, banks are unlikely to stray too far from plain vanilla deals, limiting diversification to finding such opportunities in new markets. By contrast, alternative lenders have the capacity to expand their product and sector offering.
They will benefit from gaps in the financing market, if they are prepared to meet investors’ needs with the right product offering.