The European real estate finance head of Allianz talks to David Hatcher about the insurance giant’s ability to provide and hold a broad range of loans, plus its ambitions to expand from France and Germany into new territory.
A truly diversified European lending market that is not dominated by banks is still a distant reality, however much regulators and borrowers may yearn for such an outcome.
That is not to say things have not improved in recent years. New real estate debt fund investors are appearing with notable regularity, despite a dramatic fall in pricing. However, as nimble and prolific as these new debt funds are becoming, they are generally not shaking up the property financing landscape on an individual basis.
The real, new big beasts are the insurers and pension funds and in that world few come bigger than Allianz.
“We are an insurance company with a very strong real estate ownership book, so our sponsors and borrowers know us from the equity side and know we are reasonable, professional people who have an understanding of the business,” says Roland Fuchs, Allianz’s head of European real estate finance.
“They know us and how we deal with and manage real estate, so they are not taking too much risk getting with us on the debt side as well.”
The Munich-based insurance giant, which last year generated $115.5bn of revenue, entered the European real estate lending market in 2011.
Still with a relatively modest book of €2.5bn, compiled entirely of loans held against German and French assets, the company has big plans for ramping up that number by expanding into new markets.
Influencing the market
With expectations that it will do business in Spain, Italy and Benelux in the next few months, Allianz is starting to flex its muscles. Under Fuch’s stewardship, Allianz’s lending – along with that of its closest competitors, AXA and M&G – is likely to be a steadily growing influence on the way the real estate debt market operates.
The company has completed nearly €1bn of deals in the past year but is coy about the details (see table, p17).
Borrowers are now broadly comfortable with the concept of dealing with insurers and pension funds, according to Fuchs. And many of the perceived restrictions in doing so, compared to opting to take a loan from a bank, can be circumvented.
“We can do floating-rate as well as fixed-rate loans as we have investors in the group who are non-life insurance companies, doing house or car insurance or other short-term premiums that need to be invested, and they like floating-rate,” he says.
“Most insurance companies only do fixed and long rate, but we can do everything, as we have a lot of diversity among our investor base. Recently we have done large loans on a three- or seven-year floating basis.”
However, matching pools of capital seeking long-dated, fixed-income returns with borrowers requiring debt over a lengthier period is still the speciality of Allianz and other insurers. The scale of the deals it can undertake is clearly one of the company’s major selling points to borrowers who need bigger loans.
“Everything is possible and there is no golden rule, but we don’t want to become too small on any deal,” Fuchs says. “Our minimum is around €50m-€75m as we have big buckets to invest and the small residential and retail businesses in the sector are well covered by the banking side.”
The insurer has no official upper limit on the cheques it can write, which is particularly advantageous in its home market, where having pfandbrief banks as rivals makes it extremely difficult to compete on pricing.
Sticking with Germany
“Germany is our home market and we have lots of German investors so we will never abandon it either on the equity or the debt side, but we are not going to be forced to take unnecessarily high risks or low margins just to be present there,” says Fuchs.
“We expect to have done more deals in Germany by the end of the year, but when we are competing there the deals tend to be larger. If we have super-high-quality assets, we can provide stretch senior at 70-75% LTV levels in Germany, but it is obviously more expensive. We are not limited like the pfandbrief banks to 50% or 55% LTVs – that’s not an issue.”
Allianz is able to lead deals and originate alone, but has also been working with banks in a variety of structures to close deals, as long as the portion of the loan that it ends up with is not too small.
“Often we are competing with banks, as we do not need them as intermediaries,” says Fuchs. “We do not exclude club deals, though, and this can work in different ways.
“We can have a horizontal deal structure, where we take the senior and the bank or a mezzanine lender takes the junior,” Fuchs explains.
“It can go vertically, too, where the entire risk curve is shared between banks and us, or we could work together in phases: the bank does the development loan and we do the investment loan behind.”
For Allianz, lending is a way of accessing markets that it otherwise considers as too competitive or expensive for the equity risk it would be taking on. While the debt and equity sides never compete for the same deals, they do share information and communicate with one another.
“If we pitch on the equity side then no-one will get a term sheet from us on the debt side, that’s for sure,” Fuchs says. “It may well be that an equity deal is not of interest to them at a certain time because the price is too high, but on the debt side, we could still do a deal with the buyer. If there are markets that we are strongly exposed to on the equity side, the debt side allows us to be still represented and active.”
Lending gives risk buffer
“If you lend, you have a risk buffer – even if the property is very aggressively priced on the equity side and prices go down, you still have a cushion that you don’t have on the equity side, where you are immediately affected. The debt business is not supposed to substitute the equity investments, it is just an additional way to get invested into real estate appropriately.”
Ultimately, Allianz’s aim is to have its European real estate lending business replicate the breadth of its equity business. The former has a team of nine, with two offices in Paris and Munich.
The Paris lending operation, where Fuchs is also based, is headed by Carole Tran Van Lieu and covers France, Benelux and Italy. The Munich operation, headed by Helmut Mühlhofer, covers Germany, central Europe and Spain.
“We are mandated for our first transactions outside Germany and France, which will be closed before the end of the year,” says Fuchs. “From a regulatory perspective that is all clear.”
Allianz manages and services its own loanbook and this is something Fuchs says is fundamental to the organisation’s way of doing business. “We don’t like to externalise this function – we like to do it on our own. It is a point we make to clients that if anything happens during the loan period, a service provider in London or somewhere will not confront you. You will have the people next to you throughout the term of the loan who you know and can talk to.
“The portfolio is getting bigger and we need the right people to manage the loans after closing,” Fuchs adds. “We will need to take on more middle-office people in order to do this.”
Another in-house selling point for borrowers is the fact that Allianz retains all of the loans it originates. This is a stark contrast to the approach of many other larger lenders, particularly investment banks, which aim to recycle capital and earn a margin or a fee out of selling on large proportions of their loans.
Independent funding source
“Unlike banks, we fund ourselves through deposits from insurance companies and this is entirely independent of the capital markets, which means we will always be very stable – and this is a good argument we can use with borrowers,” Fuchs says.
Having a relatively small team also means that the company can alter its strategy or focus quickly. This is especially important when markets sometimes only have small windows of opportunity.
“We like big, strong schemes where we can take a long-term view – we are not building up our debt budget portfolio and just saying ‘we want to do €500m in Germany or €500m in Spain’ – we take deals as they come, as we do on the equity side,” Fuchs says.
“That is unlike banks, where if they have an office somewhere, they have to do business there. We have a small but powerful team and that means we can do business anywhere, but we don’t have to if the price isn’t right.”
Allianz may not yet be able to boast a loanbook the size of some of the long-established banks in its home country,
but it is quickly becoming a force to be reckoned with. As its footprint starts to be found further away from its motherland, it is destined to become an even more valued player in the real estate lending market.
How Fuchs rates Europe’s property lending markets
“We have been active in the French market this year and will continue with that. As a general rule, we limit our leverage levels in markets where there is macroeconomic risk and in France we go up to 65%.
“That is why debt is the perfect solution to keeping active if there is a challenging macroeconomic situation.”
“The crisis has been correctly priced-in when it comes to shopping centres and the biggest ones did very well, losing relatively little income. They are the ones where the upside potential will be delivered the quickest. The smallest ones will never succeed and the investment market is perhaps too optimistic.
“It is still an investment market, as there are big capitalisations of listed companies and non-performing loan trades. The natural next phase is long-term investors needing long- term financing; that’s the moment for us to step in.”
Italy “In Italy the cyclical downside was not as extreme as in Spain. The amount of liquidity in terms of finance available will change from a regulatory point of view, but we are not running at every cycle just for the sake of it.
“The reduction of tax on interest coupons will allow Italian banks to team up with non-Italian investors and insurance companies more than they did in the past. Italian banks will be able to team up to finance and refinance alongside international investors such as us. There we will be limited to 60% LTVs because of regulation.”
UK “It’s not that we dislike the UK property market but we don’t have a sterling book to invest. If there is a nice sterling debt investment and we can earn the currency transfer cost, we could do it.
“However, those costs are quite high, and in the UK there is no undersupply of insurance companies and banks wanting to lend.”
Germany “To make an underwriting of €100m or €200m in the German market is not a super sexy story any more, but the fact that we always hold the entire stake we underwrite, which is different to the standard banking approach, still means we are attractive to borrowers.”
A veteran real estate lender across the pond
Allianz’s US real estate lending business is far more established than its European one, having been there for more than 30 years. It has around a $7.5bn loan book and mainly lends on prime assets, as does the European operation.
However, the loans it writes in the US tend to be smaller, with a maximum size of $150m. It has originated $1bn annually over the past three years, but this year it expects its new lending to exceed $1.5bn.
“Insurers are very established in the US as lenders,” says senior director Gary Phillips. “How much we allocate is completely independent from Europe, as the buckets of capital we invest are from US-based insurers.”
The New York-based team of eight is made up of four originators and four asset managers that handle Allianz’s US debt and equity portfolio. Its loan-to-value ratios go up to 60% on most commercial asset classes and 70% on multi-family residential.
“We usually write 10-year, fixed-rate loans, but we have a wide range of products we offer the market and can go as short as five and seven,” Phillips adds. “Shorter-term loans typically have a floating-rate component, but 90% of what we do is fixed rate.”