London-based specialist real estate lender QSix Real Estate Finance has secured a segregated commercial property lending mandate through which it plans to deploy £300 million (€350 million) of debt in the UK and Netherlands over the next 12 months.
The capital comes as an exclusive mandate from the credit fund of an unnamed global alternative investment manager, the firm said. It will materially increase QSix’s lending capacity in the expectation of the real estate lending markets becoming dislocated in the coming months.
The capital is expected to enable QSix to underwrite whole loans between £20 million to £75 million in size. With its £300 million target, QSix is aiming to invest in just one year the same amount of capital it invested across the previous five years.
QSix, which has assets under management of £1 billion, was founded in 2006 and launched its real estate finance platform in 2017 with an initial £100 million capital commitment from a US investor. For that mandate, the firm expects to exceed its IRR performance target of 6 percent. The first mandate gave the US investor access to the European real estate market, where QSix provided its first mortgage whole loan, secured against residential units in Liverpool and a £25 million office portfolio in The Hague, the Netherlands.
Typically, QSix issues two- to three-year loans with an extension option of 12 to 24 months, structured to provide a borrower with transitional finance to manage an asset ahead of sale or refinancing.
QSix’s expansion plans come just as the Bank of England increased its main interest rate to 1 percent. Last week’s increase was the highest rate in 13 years, and the Bank is forecasting inflation of 10 percent in 2022. Meanwhile, the European Central Bank is also coming under intense pressure to lift its benchmark deposit facility out of negative territory (-0.5 per cent).
Gareth Williams, head of QSix Real Estate Finance, said: “I think the market is underestimating the potential for distress. Inflation could hit 10 percent and interest rates are climbing quickly from a low base. On the balance of probability, the real estate market will not be immune to a recession.
“Banks have been sensible across this cycle. But alternative lenders, particularly in development financing, may well be adversely affected by covid delays and build cost inflation. This could well lead to real issues out there, particularly in residential development.”
QSix’s growing appetite, driven by the deteriorating economic outlook, means the firm will focus its attention on providing liquidity to small and medium-sized borrowers, including those in distressed situations.
“In the next six to nine months, the UK economy is in for a bumpy ride,” said Williams. “In the transition from a near zero rate environment, and with stronger and more persistent inflation expected, this will undoubtedly be a more difficult environment for borrowers, and could lead to existing lenders wishing to be repaid as opposed to refinance.”
Williams said its second account investor, which is seeing spreads move out in the credit markets “agrees with our analysis” as it has seen CMBS pricing widen since the start of the year, a sign that investors are seeing more risk.
He identified regional offices as a particular area where banks may find themselves “over-levered” due to the changing nature of office working and the demand for tenants for highly sustainable office space.
However, Williams described QSix’s strategy as “asset-agnostic” in order to adapt to a “volatile market”.
Williams, who from 2009 oversaw the recovery of Icelandic bank Kaupthing Singer & Friedlander’s real estate book, said the manager has readied itself to deploy capital at the right moment: “Last September the Bank of England and the ECB said that they believed inflation was transitory, [but] we were doubtful and expected rising interest rates.”