Debt vehicles take slow drive into Euro property financing


Funds start targeting harder-to-enter French and German senior debt market, writes Lauren Parr

Pink: “Since the German banks are very active senior lenders in their home market it is very difficult for us to find value”

Real estate senior debt funds are cropping up in Germany and France as well as the UK, yet there are still relatively few in total and it will take time for them to make an impact in the financing market.

At least 20 Europe-focused senior debt funds are raising capital or investing (see table below), not all of which are pure senior debt vehicles, as some also invest in whole loans. Of that total, five are only targeting the UK. Based on their collective maximum target size, these funds have an estimated fire power of around €9.6bn.

“More senior lenders are generally popping up,” says Nick Pink, Cornerstone’s chief investment officer for Europe. Cornerstone began originating European senior loans for US parent Mass Mutual last year and plans to raise a fund further down the line.

“Our US client is interested in the whole European story – limited to northern Europe for now – but our current preference is to do a few more UK deals first,” Pink says.

Although the rationale for providing senior debt is undeniable, given that traditional bank lenders have retreated from most markets, there are various dynamics at play that present challenges.

In France, there is less demand for senior lending than elsewhere in Europe because the flow of new deals is constricted. Also, as is the case in London, prime assets are being snapped up by equity buyers that don’t require leverage.

The scope for refinancing deals is also lesser than elsewhere in Europe, partly because, “in 2007, France was behind in terms of CMBS”, notes Thomas Aubert, an investment manager for La Française Real Estate Managers’ LFP Créances Immo­bilières fund (see below).

French asset manager La Banque Postale Asset Management is looking for its first investments after reaching a €500m first closing for its infrastructure and real estate debt fund in March. The fund will target senior debt in both primary and secondary markets, mainly in western Europe.

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“There are still a few new actors to come, but the strong network and real estate expertise required to build an efficient platform should limit the number of players,” Aubert adds.

Germany represents a difficult market for would-be senior debt investors to operate in. “Germany is in a relatively healthy state, but since the German banks are very active senior lenders in their home market it is very difficult for us to find value,” Pink says.

Local banks provide competition

Competition for senior debt funds comes from local banks – many with unbeatably cheap funding, raised via the pfandbrief market – and big insurers such as Allianz and AXA (see above).

The relatively low potential returns from debt funds in Germany can be a problem for some investors. Jörg Schürmann, Jones Lang LaSalle’s head of corporate finance in Germany, says: “It’s tricky, because senior debt margins in Germany are low com­pared to the UK – you might get 150bps on a five-year loan secured against a core asset. So it’s really difficult to make high returns for investors into these debt funds in Germany.”

Morgenroth: “To fulfil the terms and liabilities of mainly insurance investors it is necessary to leave the senior market”

He adds: “Real estate investors would never be happy with such a tiny return. This market is limited to investors seeking an alternative to an investment into pfandbrief bonds with a slightly higher return.”

Michael Morgenroth, a member of Austrian real estate investor Signa’s management board, says: “The senior debt market is big, without question and investors are using it more as a substitute for bond investments. But to fulfil the terms and liabilities of mainly insurance company investors it is necessary to leave the senior part of the market and go to the whole loans area, which offers 70-75% LTV ratios. This is more interesting return-wise.”

UK-based junior debt funds, such as Pramerica’s and LaSalle’s, are considering the whole-loan route to penetrate Germany’s debt market. These investors come under the bracket of international funds with an allocation for Germany.

“Quite a few junior funds are in Germany,” says Morgenroth. “The only German-managed senior fund team already investing is iii, which launched this year, and its strategy has already changed to whole loan structures.”

Its first investment, made last week, was a €30m loan arranged by Deutsche Bank for the acquisition of a residential portfolio in the North Rhine-Westphalia region.

The HypoVereinsbank subsidiary raised €200m last December from a German pension fund for its first senior debt mandate and another €100m in March for a debt fund, for which it is targeting a further €150m of institutional capital.

The strategy for iii is to invest in euro-denominated loans of €15m-€40m via participations alongside banks, secured mainly on German property.

Insurance muscle makes AXA a pan-European player

daulonAXA Real Estate is one of Europe’s most established non-bank senior lenders, having been lending for eight years. It doesn’t invest via a single fund, but deploys capital from AXA insurance firms and third-party clients in a range of funds, separate accounts and mandates.

It has €7.2bn of commitments in three main European markets: the UK (42%); France (38%); and Germany (8%). Offices and retail each contribute a third of its portfolio, and in 2011 and 2012 new loans, including bank syndications, made up about 60% of its book. The rest constituted secondary positions, like the €800m loan portfolio it bought from SocGen last year.

“We expect the portion of primary origination to increase,” says Charles Daulon du Laurens, AXA Real Estate’s head of investor relations for commercial real estate finance (pictured). He adds that AXA RE is moving up the risk curve and may carry light refurbishing or reletting risk, for example.

AXA RE is experiencing greater competition at the safest end of the market – what it calls ‘super prime’ – from German banks with access to cheap pfandbrief funding; from big insurers such as Allianz; re-entrants such as big US banks, as well as debt funds, although Daulon du Laurens says “a lot of announcements have been made but few investments done and little capital raised”.

This won’t deter AXA RE from its senior, performing loans strategy: “There’s enough to do in our playground,” Daulon du Laurens says.

The company has differentiated itself from other debt providers by boosting its per-loan underwriting capacity, in line with the growth of its commitments. “Size is the key to accessing the best deals and assets; it’s easier to escape the competition,” Daulon du Laurens says. “Banks are often limited to how much they can spend per loan, so size helps us drive terms and loan conditions by giving us more bargaining power.”

AXA RE can lend €250m-300m at a time, but a typical loan size is €100m-€250m. Where it buys secondary portfolios, individual performing loans can be €40m-50m.

Among its pipeline are further residential deals (it did a UK one earlier this year) and up to three German multi-family housing refinancings. But it is likely to remain underweight to Germany, with its focus limited to this sector and shopping centres, linked to pricing of the market.

“Germany is a tighter market than the UK or France because local competition among lenders is higher,” Daulon du Laurens says. “The office market is not in great shape and the market is not as deep as London or Paris.”

AXA RE’s home market represents 25-30% of its pipeline deals. There are a number of refinancing opportunities, as French banks have cut their lending capacity and others, like SocGen, exited the property financing market. AXA RE’s investment spectrum is wider in France, encompassing offices, retail, residential and logistics. It financed a major real estate investor’s purchase of a big, prime, La Défense office building in January.

Few deals done in Germany

Non-bank finance is a new market for Germany. In the past there was no need for structured finance, as there was in the UK or US: in Germany, banks would lend at loan-to-value ratios of up to 80-90%.

“This has changed, as a result of Basel regulations, mainly. Banks are being forced to recapitalise, reduce their risk and balance sheets,” Morgenroth says. “They are willing to finance only up to 50-60% LTV levels, as it’s easy to be refinanced via the pfandbrief market, and are looking for partners in the finance structure, including debt funds.”

Some, such as Deustche Hypo, are even considering setting up their own senior debt funds to boost profit margins in the face of regulation. It has not officially launched its fund yet but pension funds and smaller insurers have shown an interest.

With about €300bn of real estate loans outstanding in Germany, there is no shortage of opportunities for senior debt providers. But a lot of other players besides senior debt funds are looking at senior lending. So far, funds have only focused on core assets, which makes it “difficult for them to play big”, says JLL’s Schürmann.

AEW takes SELF drive into Continental property debt

christian-delaireReal estate asset manager AEW Europe set up its first pan- European senior debt fund a year ago, of which one fourth is now invested. “We’ve raised €320m and deployed 25% of that in two financing deals: one logistics portfolio and one retail portfolio, both in France,” says Christian Delaire, chief executive officer of AEW Europe (pictured).

The Senior European Loan Fund (SELF) focuses mainly on France, Germany and the UK, as well as both primary and secondary debt investments. It targets around 5% returns and has an overall €500m target size.

With more than €18bn of assets managed in funds, separate accounts and retail business, AEW Europe sees this fund more as a fixed-income than real estate product in terms of risk profile, so joined forces with sister company and fixed-income specialist Natixis Asset Management to provide full management. AEW Europe contributes the capacity to source and underwrite senior debt.

“We decided to diversify into debt two years ago, starting with senior, as there was major interest from clients in terms of the risk/return profile,” Delaire says. Now more opportunities have opened up, “one thing we’re considering is setting up club deals for senior opportunities that, for one reason or other, don’t fit in with our fund.” Another French debt fund manager sees AEW Europe as a value-added, rather than core, investor.

AEW’s other focus is marketing a proposed opportunistic fund to invest in real estate and, occasionally, riskier debt such as mezzanine or preferred equity. Run by Russell Jewell and Simon Blaxland, it is talking to US, European and Asian institutional investors.

Funds have minor refinancing role

Senior debt funds will refinance no more than about 1% of the €300bn outstanding, he predicts. “They are a helpful additional provider of senior debt but there are not that many and they are not the big source for solving debt problems in Germany.”

Returns are an issue for UK-focused funds too. “Terms have become more aggressive and margins are falling,” says Philip Cropper, director at CBRE Real Estate Finance, which is setting up a senior debt origination operation with Cairn Capital. CBRE has hired former Deutsche Bank originator Steve Williamson, who is pursuing a high-quality, low-risk strategy.

“Margins have fallen 50-75bps since people started talking about these funds a year or so ago; what would have been 5% is now 4%. The opportunity has changed; to get more margin involves taking more risk.”

Preferred investment durations are also complex. Fixed-income mandates for real estate senior debt are not all the same, but “institutions generally look for as long a term as possible, and although you can create longer duration investments by recycling capital if you have a strong origination platform, that doesn’t quite match what they are looking for”, Cropper says. “The problem is, how many property companies want to borrow for seven to 15 years?”

He believes future growth in senior debt investing is likely to be “predominantly on a segregated account basis rather than in funds. Fixed-income investors won’t necessarily want full discretion, but they will want involvement in the process.”

Vive La Française as Gallic manager hits second closing

thomas-aubertLa Française Real Estate Managers held a €50m second closing for its €400m senior debt fund in May and is close to completing the fund’s third deal.

Two weeks ago it closed a €35m loan purchase with French property and real estate debt fund manager Acofi.

Acofi launched a senior debt fund for corporate real estate in France last year with French insurer Groupama. It has raised €280m of a €400m target from Groupama clients.

La Française’s financings before this were in the hotel and healthcare sectors. “The first loan we bought was a secondary deal; we bought a €20m position in the financing of a portfolio of hotels managed under the B&B brand,” says Thomas Aubert (pictured), one of LFP Créances Immobilières’ two investment managers. “We also originate loans and take part in club deals.”

Its typical transaction sizes range from €20m to €70m. The fund has closed or is working on five deals in total. By the end of July it will have added around €60m of investments to its portfolio, reaching €175m – half the size of the fund.

In May it provided a €60m, seven-year financing on a bilateral basis for a mixed portfolio of retail, hotel and healthcare assets owned by French listed REIT Foncière des Murs.

La Française targets senior lending in France alone and plans to be overweight in offices. Its focus is on core-plus and value-added assets and it aims to generate a gross return of 250-350bps over Euribor, before management costs and fees, for its insurance company investors.

Headed by Bertrand Carrez, the fund is hold-to-maturity by nature, with a five-to-seven-year investment horizon.

However, demand for senior financing in France is lower than it was two years ago.

“Origination is tougher than expected. If you don’t have an in-house network to talk directly to borrowers as well as property expertise, it can be difficult to underwrite projects,” adds Aubert, who works alongside fellow investment manager Alexandre Hamon.

“Senior financing is still a big space in which to work, though, refinancing existing bank debt, as banks have less balance sheet to provide.”