New property debt providers will offer investors a wider range of strategies, while debt products will also change and evolve, said speakers at Henderson’s debt seminar. Alex Catalano reports
New non-bank lenders are proliferating and will restructure the way real estate debt is provided, according to speakers at a recent seminar hosted by Henderson Global Investors and moderated by Real Estate Capital.
Speaking at the European Real Estate Debt: From Crisis to a New Model event, held in London in July, Hans Vrensen, global head of research at DTZ, noted: “We see a lot of volume coming out of non-bank lenders. It’s happening much quicker than most people thought.”
Vrensen estimated at least £50bn will come from these new sources over the next two years. According to John Feeney, Henderson’s head of real estate debt: “A menu is emerging, where investors have access to many different strategies and returns, in some cases taking greater leverage risk, in other cases taking risk on a lower-quality asset base.”
Most of the existing debt vehicles are either “established mezzanine” ones, he added, which invest at significant leverage on relatively high-quality assets, or distressed debt funds, with lower-quality assets and low leverage, because they buy at discounts.
But funds with new strategies are emerging, such as high-quality, low leverage “core senior” funds targeting 4-6% returns; “funky senior” vehicles looking for 6-8% returns, with low leverage but somewhat lower-quality assets; and “core- mezzanine” vehicles, with less aggressive leverage than established mezzanine funds and seeking an 8-12% return.
Andreas Würmeling, managing director and head of secondary markets at Deutsche Pfandbriefbank (Pbb), said banks would become “debt platforms”, taking an active role in channelling the new capital to their clients.
“I think we can add a lot in that regard, as we have a Europe- wide network that has estab-lished underwriting capacity, with legal and property experts.
Banks need reliable partners
“It is extremely important for us that we get someone in front of our clients who is a reliable partner,” Würmeling added. “We’re not only looking at the execution of deals, but for reasonably experienced people on the fund management side and an investor base that is sustainable behind them.”
Würmeling also predicted that banks and other lenders would start to offer more fixed- rate products. Pbb has already started offering this option. “Ultimately it is the client’s decision what they go for,” Würmeling said.
“One of the most problematic points is that most investors on the insurance lending and debt fund side are fixed-rate investors, but the loan market is a floating- rate one,” he added.
“If one lender does floating and one does fixed rate, you can’t get the money working together properly. “In the past 12 months we’ve combined the two, on a tranche basis, where one is a fixed-rate tranche and one is a floating- rate tranche. But that causes all kinds of concerns and issues.
“To match the expectations on both sides, we need to start writing fixed-rate loans and get away from derivative products.” All the regulatory changes concerning hedging derivatives are in any case making floating- rate products very expensive for banks and financial institutions.
However, there are question marks over how the new lenders will operate. “One question concerns the sustainability of the provider,” Würmeling said. “The life of a fund is seven years, so at the end of my loan term, who is going to refinance it? We don’t want leverage to be very high for a four-year period and then for the borrower to be stuck again.”
Henderson plans core funds
Henderson is raising capital for a core senior and a core mezzanine debt fund, both of which will be closed-ended vehicles with a seven-year life.
According to Feeney, these funds will make seven- or six- year loans during the initial two-year investment period, but shorter, five-year ones as they approach the end of it.
“In every case we will be looking to be repaid at matu-rity,” he said. “We don’t see that the banks will return to dominate the market as they have done traditionally, so this will continue to be a space for debt funds on an ongoing basis.
“We’ll be looking to have repeat funds; funds that have access to different debt opportunities over time.” However, Henderson is also worried about refinancing risk, which is why it is focusing on the conservative end of the debt spectrum.
“Going into secondary or tertiary property assets, in many cases there is lots of extra return available, but there is just no visibility as to where the capital comes from at the end of your loan term,” Feeney said.