Insurers are entering the gap left by banks, with senior debt funds set to follow, writes Jane Roberts
For acquiring the City’s iconic Tower 42, £145m; £117.5m towards Moorfield’s and Segro’s acquisition of the UK Logistics Fund; £125m to refinance Hercules Unit Trust, the UK’s premier retail warehouse fund; for self-storage company Big Yellow, £100m; to the UNITE student accommodation fund, £121m; finance for Quintain and Wellcome Trust totalling £185m; £266m for private equity firm Round Hill to clinch the Nido student housing business from Blackstone…
The list is of some of the largest senior mortgage deals completed in the first half of 2012, and what they have in common is that they were financed not by banks, but by insurance companies.
Aviva, MetLife, M&G Investments and latterly Legal & General have been targeting large loans with strong sponsors. And as Henderson’s head of real estate debt, John Feeney, pointed out at the Lloyds/Real Estate Capital round table, while banks will still be a major part of the real estate lending market, the emergence of different lenders is gathering pace.
Feeney is setting up a senior debt-investing platform along with fixed-income colleague Colin Fleury at Henderson. William Newsom, head of UK valuation at Savills, said this month that the transition from ‘old’ to ‘new’ lenders is “the biggest structural change in property lending in the past 20 years”. If that sounds exaggerated, he calculated that insurers have written or participated in £4bn-5bn of senior lending in the past 12 months.
Last year, AXA Real Estate took participa-tions in €1bn-worth of UK loans, according to head of CRE Finance Isabelle Scemama.
Large lending remit for Aviva
Aviva Commercial Finance has written at least £728m of new business in half a dozen deals reported by Real Estate Capital just since last September. Though the team, led by Kevin Sale, would never say so, according to lending sources they have the remit to write as much suitable business as they can find.
M&G Investments has lent £1.2bn of senior debt in the past 12 months, according to head of senior commercial mortgages Paul Dittman “and we have lent at least £500m since the start of 2012”. The insurer has capital from affiliates of its Prudential insurer parent to invest in senior loans and it can look at all kinds of opportunities spanning senior and junior debt, whole loans, performing secondary loans and loan-on-loan finance, giving it a wide field to play in.
It completed the largest deal in the past 12 months, at £400m, comprising a £150m new loan and acquisition of £250m of secondary loans from Kennedy Wilson (see May issue, p19). Its next ambitious target is to lever its success and raise £1bn-2bn of largely third-party capital for senior mortgages.
London is big market for MetLife
US insurance group MetLife says it expanded its international lending activities in 2011, “originating nearly $800m of mortgages in London”.
Robert Merck, global head of real estate investments for the US’s largest lending insurer, said in February: “We are particu-larly attracted by the market opportunity in the UK, where very favourable conditions continue for lenders like MetLife.”
The new lenders, and would-be lenders, fall broadly into two camps: the insurance companies, and senior debt funds or senior debt investment mandates, structured and advised by fund managers. The would-be lenders who have yet to lend a pound still outnumber the active lenders by a long way, but represent future market capacity.
Insurance companies are out in front, and in Newsom’s words, “having such a good time” because unlike many banks they have few legacy sub-performing loans. “They have no capital adequacy issues, they have real money investors with cash to invest and no Basel III or slotting, just Solvency II, which is considered to be relatively benign.” The UK insurers also have the back-up of experienced direct property investing teams.
Aviva is the most familiar to UK property companies. The group has been lending for nearly 30 years and looks for long-term, amortising loans, normally at least 15 years, at fixed margins over gilts, to match its parent client’s annuity book. But Sale’s team can surprise. Last year, Aviva lent Primary Healthcare Properties seven-year, interest-only money.
“If their annuity book suddenly has to provide a five-year product, then they can lend relatively short-term money, but it is sporadic and limited compared to the bulk of their business model and something they offer very discretely,” says one source.
Aviva is also quietly looking at sectors it has not lent in before. Its £100m, 15-year loan to Big Yellow last month was the first by an insurer to a self-storage business. “They said they would do one such deal and get comfortable, and then they might do some more,” says Caroline Snowden, a director of JC Rathbone Associates, who advised Big Yellow. One lawyer says Aviva is considering offering a product structured for sharia clients for the first time.
Getting to understand and keep up with new lenders’ different strategies and risk appetites will be a feature of the market for borrowers in the years ahead. Ashley Goldblatt, head of commercial lending at Legal & General Investment Management, believes banks, with their established networks of relationships, can play a role in bringing both sides together. For example, Rothschild advised L&G on its first loan, a £121m, 10-year, fixed-rate loan for UNITE Student Accommodation Fund. “A lot of banks have been to see us, as most borrowers have never dealt with a long-term institution like us,” says Goldblatt.
Snowden adds: “When borrowers say: ‘I have never done a deal with an insurer’, I tell them that their risk exposure is very different. Their funds come from insurance premiums and pension contributions that have to be invested.”
Goldblatt’s capital is sourced from LGIM’s annuity business, and mortgage investments must show a premium over corporate bonds. “We are in this to make money,” he says. “We are trying to exploit the value gap that has arisen and have our own value framework.”
To this end, he says L&G is not looking to build up a book of any particular size but will be driven by suitable deals available. It will consider terms as short as seven years, but would prefer longer: “From a capital-efficiency point of view, longer than 10 years works better, but it doesn’t have to be.”
The nature of the liabilities MetLife is writing in the US are different again. Like M&G Investments, MetLife has carved out a niche partly because it offers shorter-term five-year loans as well as longer-term ones.
In the UK, the group has lent with banks including DekaBank and, most recently, RBS and Lloyds to refinance Hercules Unit Trust, managed by British Land and Schroders.
For insurers, working with banks that have the same lending criteria has advantages, says Norton Rose finance partner Duncan Hubbard: “Insurers, for example, don’t have facility agencies and trustees; banks do.”
Banks can lend alongside insurers
Simon Carter, British Land’s head of treasury, says: “Nine months ago, I might have felt it would be difficult having banks lending alongside an insurer because of potentially different lending criteria. But this deal [ for Hercules] suggests that it might not be a problem,”.
MetLife prefers to focus on deals in London or the south-east, except for distribution assets and retail warehouses. It will also consider hotels in central London. “We typically do larger deals of £50m to £150m and the middle is where most of our deals are at,” says London head Paul Wilson.
With more competitors limbering up, competition for the best assets and sponsors is bound to get a lot fiercer.
M&G is looking wider at big mainland European deals, while Cornerstone plans to start lending this year (see profile, p20). Like MetLife, it will work with Laxfield Capital, an intermediary run by bankers Adam Slater and Emma Huepfl, who can both originate business via their extensive contacts and manage loan portfolios, while their clients build up a business.
“It’s another way to get in touch with the market,” says MetLife’s Wilson. “In the US there is more of a brokerage community: 50% of our deals come via brokers, 50% direct.” Pricoa Capital, meanwhile, opened up for business this year, led by Andrew Aberenthy, based in the City of London; as has AIG, headed by Stewart Hotson.
With the possible exception of Aviva, no insurers are looking at more asset-manage-ment-intensive assets yet. “We are working with stabilised assets but not development finance,” says Wilson.
Some US insurers have credit committees back home and deals may have to be fairly straightforward to get the capital. This may leave plenty of opportunities for the next wave of the new generation: the debt funds.