Deutsche Bank quits third – party loan-on-loan lending and sells Old Burlington Street debt to AXA and M&G

Bank targets equity positions in debt deals with partner Kennedy Wilson

Deutsche Bank is no longer providing third-party financing for real estate loan portfolio purchases and now favours equity participations instead.

The bank has linked up with US investor and asset manager Kennedy Wilson in a €2bn partnership to buy European loan portfolios.

“We realised that the risk/ return profile wasn’t a good road to value compared to being in the equity, where your returns are in the mid teens,” said Don Belanger, a managing director in Deutsche Bank’s real estate finance team.

“We form joint ventures with people that have asset management capability and we will put in most of the equity as well as financing the balance.”

A small number of lenders are pursuing loan-on-loan financing, including Citigroup; Royal Bank of Canada; M&G Investments; Goldman Sachs; Bank of America Merrill Lynch; and HSBC.

The business offers high margins, typically 600bps over euribor, and the payback period is around three years, allowing capital to be quickly recycled.

Belanger said this is both positive and negative, however: “One of the reasons we don’t like to do this any more is because we might be earning, say, 700bps over [euribor], but if our money is only out for a year, it’s really not very accretive.”

Kennedy Wilson announced “a framework with a global financial institution targeting the acquisition of €2bn of performing and non-performing loans with a focus on the UK and Ireland” this month.

The pair bought Lloyds’ €360m Project Prince Irish portfolio a few weeks ago. “It was purely a yield play,” said Belanger.

“It’s difficult to work out a  lot of the assets [which are scattered throughout Ireland] because they are small, but if you buy them at the right price you can make your money back over a period of time.”

In November, the pair won Bank of Ireland’s $2.1bn UK loan portfolio. They are also bidding on Lloyds’ £645m Project Harrogate; Allied Irish Bank’s £340m Project Pivot; and its €675m Project Kildare.

M&G Investments and AXA Real Estate have acquired the debt used to finance the acquisition of Queensberry House in Mayfair by an Italian buyer last month.

Rome-based fund manager Sorgente Group paid £167m  for the Old Burlington Street building, financed with £97.5m of debt from Deutsche Bank.

Deutsche Bank, which has an existing relationship with the Italian firm, sold on the loan to the two insurance groups.

The multi-let asset is a slightly unusual investment for the insurers in that although the location is prime, there is letting risk, with three tenants free to move in the next 18 months.

This is understood to be reflected in the debt’s margin, thought to be near 400 basis points. M&G and AXA were said to be keen to take the whole deal but agreed to take half each.

M&G and AXA have been two of the leading originators and participants in large loan deals in the past year and their half shares in the Queensberry House senior debt are relatively small investments for them.

AXA has also taken a participation in the £220m  loan Goldman Sachs made to Blackstone to acquire City estate Devonshire Square.

Goldman is negotiating with other investors to sell down more of the loan but plans to keep some back to put into the global debt fund the bank is raising.

Deutsche Bank has made about half a dozen loans in the past three months, according to one source. These include refinancing Brockton Capital’s 56 Curzon Street residential development.

The bank is also financing 20 Grosvenor Square, which is to be redeveloped as luxury housing by the state of Qatar and Richard Caring.

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