With the launch of its debut real estate debt strategy, French heavyweight Amundi has joined a European property debt fundraising drive that shows no sign of abating.
The firm, which manages €1.4 trillion of assets in total, is aiming to raise up to €500 million for a commingled fund. In addition, Amundi has also secured a segregated lending mandate from Crédit Agricole Assurances, the insurance arm of one of its parent banks, which provides it with an additional €300 million. Across the strategy, it will deploy capital through senior lending in eurozone countries.
A traditional real estate equity player moving into debt is becoming a familiar story in the market. The growing interest in private real estate debt as an asset class has prompted the launch of a series of vehicles with varying risk profiles, including BNP Paribas Asset Management’s €1 billion eurozone-focused senior debt fund and Schroders’ whole loan strategy, through which it is aiming to deploy £200 million (€228 million) across the UK.
With fundraising activity in full swing, Amundi has entered a competitive market. The firm is aiming to capitalise on its strong track record in managing fixed income to attract institutional investors seeking steady yields while minimising risk.
Real Estate Capital headed to Amundi’s head office in Paris to find out how real estate debt will fit into its overall investment strategy.
Visitors to Amundi’s prominent headquarters on Boulevard Pasteur, are greeted in the lobby by a slogan against a background of hot air balloons: ‘Confidence must be earned,’ it reads. It is a pertinent message as Amundi makes its debut in the property debt space.
“To legitimise our credentials, we need to remain within the field clients are expecting us to be,” explains Pedro Antonio Arias, head of Amundi’s real and alternative assets division. “Our traditional clients don’t look for high risk; they are typically investing in fixed income. We are now offering them the less risky part of the real estate capital structure, which is debt.”
Bertrand Carrez, head of the firm’s real estate debt strategy, adds: “This is a mixed product; obviously real estate-flavoured, but also within the fixed-income sphere, which allows our investors to diversify from their bond exposure.”
Amundi’s property debt strategy is targeting net returns of 200-250 basis points, which Carrez notes compares favourably with BBB bonds issued by REITS which typically generate 60bps. “As long as spreads in the bond market and interest rates are where they are, we will offer a yield premium which is attractive to investors,” he says.
Thierry Vallière, the firm’s global head of private debt, explains the decision to target returns at the lower end of the risk spectrum reflects that the firm is raising capital from investors “seeking regular income, limited volatility and capital preservation”.
At the same time, due to the current low-yield fixed-income environment, investors want to secure a relatively “attractive” premium for the risk profile linked to the traditional liquid debt capital market, Vallière adds.
Delivering that premium, however, is a challenge in a market in which most debt providers are providing vanilla senior finance and avoiding edgier schemes, generating a situation where financing mandates for core assets in prime locations are subject to strong competition, with subsequent margin compression. In France, for instance, margins in Q1 2018 for 60 percent loan-to-value senior lending inched in to 1.05 percent, from 1.10 percent in the previous quarter, according to data from CBRE.
“It’s true that there’s too much capital and returns are compressing, but the premium we can deliver on what you can find in traditional capital markets is relatively stable. It remains at a premium of 100-150bps, which is attractive,” Vallière notes.
“A large portion of the banking market is targeting very core transactions today – the best properties in the best locations. For these assets, you can expect low margins in the area of 80-100 bps, but these are not the assets we are targeting for our debt strategy,” he explains.
Amundi’s fund will focus on core-plus assets, with some scope to lend to value-add properties, to provide returns in the range of 200bps. “The strategy also allows us to lend in alternative jurisdictions within the eurozone, like Southern Europe, where you might get a better return. Our flexible approach also includes the alternative segments; hotels, logistics or healthcare assets,” Carrez says.
Through the vehicle, Amundi will predominantly provide loans with floating rates of interest, to offer a hedge against rising interest rates. The sweet spot for lending will be between €30 million and €50 million per asset, with leverage between 50 percent and 70 percent.
The €300 million mandate will have a more defensive profile than the fund for external investors and will issue loans with a maximum loan-to-value ratio of 60 percent and margins below 150bps, Real Estate Capital understands.
Amundi recently closed a transaction for the segregated mandate, backed by a portfolio located across France. Another deal in the pipeline, backed by a retail asset in Italy with a US fund as sponsor, is due to close shortly. In total, the firm is expecting to deploy around €100 million by the end of summer for the segregated mandate.
For the third-party debt fund, the asset manager is looking for opportunities among different asset classes in countries such as Spain, Italy, France and the Netherlands. “In the pipeline we are also looking at portfolios of assets; an opportunity backed by a portfolio of hotels in Spain and a residential financing portfolio in France, too,” Carrez notes.
The firm is still raising capital for the fund’s first close, expected to take place in July, after which it can deploy capital. So far, it has attracted €100 million from investors. “We are reasonably optimistic on the fundraising, even when there’s competition in the market,” Carrez says.
Amundi’s French peers have stepped up their fundraising activity in the past year. In September 2017, AXA Investment Managers – Real Assets closed its 10th senior property debt fund with €1.5 billion raised. The partnership between AEW and Ostrum Asset Management expects an imminent final close on its second property debt fund on €549 million. Other players, including Acofi are fundraising, with the aim to raise €600 million of capital through its fifth real estate debt fund by July 2018.
“If there’s no competition, there’s no market,” says one French real estate debt fund manager, who preferred to remain anonymous. “If Amundi or any other large asset manager is coming to the market, that means there’s room for them.”
“The arrival of Amundi adds firepower to real estate debt. We need to increase our weight in the market. The more you see managers focusing on real estate debt, the more investors’ awareness of this asset class will increase,” another French fund manager adds.
Investors are keen on real estate debt, according to Real Estate Capital data. In 2017, investor demand fuelled more than $10 billion of fundraising for private real estate credit vehicles focused on Europe, an increase of 141 percent year-on-year.
At the same time, lending sources are changing. In the early 2000s, banks were almost the only source of real estate funding in Europe. By 2014, the market became more diversified, with Cushman & Wakefield identifying 186 active lenders, of which just 53 percent were banks.
While debt funds are growing their share of Europe’s real estate lending market, banks are increasingly following an originate-to-distribute model, driven by Basel banking regulation, Carrez says. “Banks are willing to arrange transactions, to originate, but they don’t want to underwrite and hold loans on their balance sheet as before. This trend in today’s market creates a situation that favours partnerships with banks, instead of being in competition.”
Through its debt fund, Amundi is keen to deploy through club deals or through participations in the syndication market. The strategy will also allow it to originate its own loans when opportunities arise with the right structure and pricing, Carrez explains.
“We are confident we can deploy our capital by originating or co-financing transactions. Even when the direct market offers lower volume, there’s potential to refinance existing debt: in Europe there’s more than €1 trillion of debt in stock to be refinanced, half of it in the next three years,” he says.
Amundi has grown rapidly as a manager of real estate assets. Four years ago, it managed €8 billion; it now manages €27 billion.
“It was a natural step to move into real estate debt. We have very strong expertise in buying real estate assets, so we know how to analyse a building, we have this expertise,” Vallière notes. “We can mix this expertise with our fixed income and credit know-how.”
The French giant hopes it can also take advantage of its access to deal flow and source the right deals for its debt strategies. “One of the beauties of being large within real estate is that you attract the deal flow, just because you are large,” says Arias. “Size gives you the capacity of being more selective than a boutique with limited access to deals.”
Amundi’s investment strategy on the equity side remains focused on large deals to secure core assets. The most prominent property investment by the asset manager in 2017 was the acquisition of the Coeur Défense office complex in Paris’s La Défense business district for €1.3 billion – the single largest commercial property transaction of the year in France. The purchase was financed through a €900 million debt facility provided by BNP Paribas, Crédit Agricole, ING and Natixis. The seven-year, fixed-rate loan was syndicated to a pool of French and German banks.
Another significant deal last year was the acquisition of The Atrium office complex in Amsterdam. The group acquired the complex in April for around €500 million and sourced a €300 million loan from Allianz Real Estate and ABN Amro. The seven-year, fixed-rate senior debt facility, with a LTV ratio of around 60 percent, is thought to be the largest single-asset financing in the Dutch office market this year.
“On the equity side, we are now raising cash, and not deploying capital yet,” Arias says. “We will probably be back in the market in September or October.”
“Yields have compressed, so we will focus on large deals because we truly believe this is where there is still a little bit of premium for core assets,” he notes, adding that it is probably a good moment to refinance existing assets of the portfolio at fixed rates, given the yield compression.
Amid the late property cycle, it is much more difficult on the equity side to source core opportunities in some European markets, Arias acknowledges.
“In Spain, for instance, it is difficult to find core products for real assets with a good return which compares with the kind of return that you will find in Paris or Berlin,” he says, adding that investing through debt in markets such as Spain makes sense, because lending provides safety through limiting LTV and applying covenant protections.
Vallière also highlights the defensive nature of property debt investments. “We are doing credit, so we decide where to invest in the capital structure. We work out the structuring of the financing and take protective measures,” he notes.
Asked where we are in the property cycle, Vallière says this is more a question for real estate equity investors. “Obviously we are concerned about the value of the assets that we are backing with our loans, but if the market decreases by 10 percent, it’s a big deal for equity investors because the value of their portfolio drops accordingly.
“On the other hand, for debt, if the value of the asset decreases, it increases the LTV of the loan, but it’s likely you have some protection with the legal documentation. The equity sponsor could put some additional cash reserve to decrease the LTV and come back to what it was agreed initially.”
Investors are increasingly seeing debt as a valid option to access real estate assets at a time when valuations across many of Europe’s property markets are trading at record levels. Arias, however, notes the launch of the strategy was not solely determined by this market momentum.
“We’re not opportunistic investors,” he says. “We invest along the cycle, regardless where we are in the cycle.”