Legal & General’s three-year loan to GreenOak demonstrates how insurance companies are laying their roots in unfamiliar territory, writes Daniel Cunningham
When GreenOak Real Estate set out to source a three-year financing for a mixed-use site in London’s Whitechapel – as stop-gap finance ahead of an eventual redevelopment – it was unlikely that an insurance company should top its list of prospective lenders.
However, when debt advisor Capra Global Partners scoured the market for the most appropriate terms, it was insurer Legal & General that won the mandate. More often associated with 10-year-plus lending, L&G’s property team has gradually provided shorter-term debt, and this three-year deal was its shortest yet. The firm priced the £39 million (€43 million) facility at an all-in cost of 2.4 percent.
The deal demonstrates that institutional lenders are becoming more flexible in their lending terms to win business that traditionally the banks would have cornered. Such is the nature of insurers’ liabilities, long-term, fixed-rate lending is the more natural fit for their in-house accounts.
The problem they face is that only a small section of the real estate market demands that type of debt, which comes with high pre-payment fees. Laxfield Capital’s latest UK CRE Debt Barometer, which examines borrower requests for property finance, showed that 70 percent of requests were for five-year loans.
In a market in which a five-year investment mentality is prevalent, insurers need to adapt to compete. Several have done this by raising third-party debt funds, which offer floating-rate products for terms comparable with bank debt.There is also an increasing appetite from insurers to offer short-term loans from their in-house accounts; L&G is understood to have written the GreenOak loan from its annuity fund.
Elsewhere, Aviva Investors’ real estate arm has offered an element of shorter-term floating-rate debt to complement its longer-term lending and has recently launched a multi-asset strategy to provide floating-rate, five- to seven-year loans from a combination of third-party mandates and an open-ended fund.
Large US insurers, including MetLife and MassMutual, through its Barings brand, came to Europe to lend long-term, but have also provided bank-style debt to the property sector.
Insurers consider real estate debt on a relative value basis. For the real estate lending teams within some insurance companies, the requirement is to present opportunities that provide a higher return than corporate bonds at the same tenor, assuming a deal is rated as investment grade. One insurance lender pointed out that bond spreads are higher for longer terms, meaning that writing three- or five-year real estate loans can offer higher relative value than 10- or 15-year tenors.
There are also diverse sources of money within in-house accounts, including annuities of varying terms and accident insurance. Some teams are granted access to pools of capital generated from in-house account profits, which are to be reinvested across asset classes with the flexibility of not being required to match liabilities.
Pension fund lenders can also be flexible on the term of loans. Some have been providing three- to seven-year real estate debt for several years to maintain a diverse loan book from their real estate allocation.
Short-term property loans are a small element of institutions’ overall books, which invest on behalf of multi-billion accounts. As one lender from an insurance firm said: “Short-term lending makes sense around the edges.”
L&G’s three-year loan is an outlier compared with the facilities insurers typically provide, but it demonstrates that alternative lenders from the institutional investor market are taking a flexible approach to how they provide direct property debt. As short-term loans are increasingly provided by insurers, borrowers will find it difficult to predict from which lenders the most competitive capital will come.