It is a sign of the times that one of the largest loans to be closed in the European commercial real estate market so far this year was done entirely by an insurance company many would be forgiven for not having heard of.

Rothesay Life insures defined benefit pension payments for corporates and other insurance companies. In January, it closed a coveted financing mandate with a £689 million (€780 million) loan to South Korea’s National Pension Service to fund the sale-and-leaseback of Goldman Sachs’ European HQ at Plumtree Court in the UK capital.

It was the type of loan that, once upon a time, would be almost guaranteed to have gone to a club of commercial banks. With a five-year term, a loan-to-value ratio below 60 percent and a margin understood to be below 150 basis points, it was done on terms most obviously associated with the banking sector.

However, Europe’s real estate lending market has its most diverse set of participants ever and it perhaps should not have come as a surprise that an insurer, which plans to keep the loan entirely on balance sheet, single-handedly took on the debt mandate.

Several insurers have built property loan books during this cycle, taking advantage of banks’ reduced appetite for real estate financing. Among them are the sector’s big names, including Allianz, AIG and AXA. Rothesay Life, which was launched by Goldman Sachs in 2007 and is now owned by Blackstone, GIC and MassMutual, has a lower profile, specialising in insuring annuities provided by other parties, rather than offering insurance products to the public.

From its offices in the Leadenhall Building, the London tower better known as the Cheesegrater, Rothesay Life has been quietly building a real estate loan portfolio since 2015, when it stepped into the market to provide a £220 million financing of motorway service areas in the south of England. Harish Haridas, who joined as head of commercial real estate debt in 2016, used to be a banker, working on pan-European CMBS issuance for Morgan Stanley from 2005, before a stint at Royal Bank of Scotland from 2010 working on deleveraging the bank’s exposure to continental European commercial property.

When Real Estate Capital meets him, Haridas is busy finalising almost £1 billion of lending deals, including the Plumtree Court deal and a £180 million loan against the Sanctuary Buildings office property in London’s Victoria area, also recently bought by South Korean investors, Hana Financial Group and Kiwoom Securities.

Around £1 billion of annual commercial real estate lending can be expected from Rothesay Life, Haridas says, although this will fluctuate depending on the volume of liabilities the firm needs to match and the quality of loans available. He recalls an early conversation with his management when the former banker asked about his annual target.

“I was told the target is not to originate a certain volume, it was to be in the flow. The aim was to screen as many of the transactions taking place, but invest only when the right one came along,” he says.

The watch-and-wait mindset does not always come naturally to former bankers, he admits. “When you are living with risk over the long term, as insurance companies do, you need to live it very comfortably. When people join a company like this from the banks, they want to do deals.”

However, it is important to have the mindset that turning down deals which do not fit the risk level the business is comfortable with is “perfectly normal”, he adds.

The firm’s high volume of recent property lending was driven by a sudden increase in its assets under management. In March 2018, Rothesay Life acquired a £12 billion annuity book from Prudential in a landmark deal for the company. Total AUM was boosted to £37 billion, having hovered around the £24 billion mark during 2016 and 2017.

“That’s the benefit of being privately held,” says Haridas. “For the best part of 12 to 15 months from the start of 2017, there was very little done on the liabilities side because we thought pricing was too tight. We can take the long-term view and stay disciplined.”
With a staff of 200, mainly based in London, but with some in the US and Australia, Rothesay Life does not aim for a large turnover of deals, but focuses on jumping into action when a large-scale opportunity arises.

“We mostly sit here in London on two floors, so it makes for nimble decision-making,” he says. “The firm prides itself on being able to analyse complex and fast-moving situations quickly and this has been the key driver for our winning mandates despite the limited brand awareness of the Rothesay name in the CRE lending market during our early days.”

Rothesay Life’s reputation is building, property finance professionals tell Real Estate Capital. One former banker-turned-debt advisor says the firm has been known for involvement in non-mainstream activities such as ground rents financing, although its presence in the core commercial market has more recently increased.

To lend at scale requires spotting opportunities that generate stable income from senior loans to prime properties in core locations; a competitive part of the market. With a 20-year credit tenant lease to Goldman Sachs, Plumtree Court ticked all boxes.

“We can invest in deals across a wide maturity, typically between five and 15 years and occasionally longer, so for borrowers, Rothesay Life taking down a large ticket means reducing reliance on large club deals, which could take longer to execute because of multiple stakeholders,” says Haridas. “We will typically write loans between £150 million and £250 million, but as Plumtree Court shows, we can do bigger tickets.”

Just under a quarter of Rothesay Life’s £37 billion asset portfolio is accounted for by secured property lending, which includes social housing, ground rent financing and equity release mortgages, as well as commercial real estate loans.

“The most obvious investment class for insurers is corporate bonds, due to the size of the market and the exchange-based nature of investing in these assets,” he says, “but Rothesay has avoided an overly large exposure to corporate bonds in favour of hard assets. Within the wider private debt market, commercial real estate provides a good risk-reward balance. If you lend at 60 percent LTV, the chances of loss, particularly on a prime asset, are relatively low. You can’t buy and sell a real estate loan on a screen like you can with corporate bonds, but we are able to put a little less reliance on liquidity, given the longer-term nature of our capital.”

Regulation of the insurance sector is another major driver of property debt activity. The firm’s ‘capital-lite’ model has allowed it to continue to grow under European Solvency II regulation, part of which involves off-setting liabilities through investments in illiquid credit which generate enhanced risk-adjusted returns. The capital cost of holding direct equity assets is punitive for insurers, making senior loans the preferred route for exposure to assets rather than direct ownership of the bricks and mortar.

“Regulation is a critical driver of our investing strategy,” says Haridas. “At the present moment, we only do senior property lending, with no equity or mezzanine positions in our book. There will be periods of time when we have to be patient. For example, we haven’t done a real estate loan in the US for a year because the pricing was too tight. We financed Nike’s flagship store in New York in August 2016, because the UK had shut up shop after the Brexit vote and the US was competitive. We lent at around 200bps, but by Q3 2018, a similar loan would have priced at around 125bps.”

Real estate debt, however, has maintained its relative value premium to more liquid assets, Haridas explains: “Illiquid real estate credit should provide a premium to corporate bonds of the same tenor because of the smaller number of participants and the time and resources invested in structuring and negotiating CRE loans. This was recently evident in the US where the sharp correction in the US corporate bond market was followed by an equally sharp correction in CMBS spreads.”

Talk turns to the prospect of rising interest rates. While they usually indicate improved economic activity and therefore higher real estate rents, stagflation – a combination of economic stagnation and inflation – can worry those active in the real estate market.

“In most UK and European markets, CRE yields are at or above their historic risk premiums to the underlying government bonds and hence provide some element of buffer to rising interest rates,” Haridas says. “However, the fact that in some markets, CRE yields on an absolute basis are at historic lows is a cause of concern and therefore we focus on ensuring that our debt yields are at levels above historic highs seen in past downturns.”

Haridas: around £1 billion of annual commercial real estate lending can be expected from Rothesay Life (Julian Winslow Photography)


While commercial property lending commands a premium to bonds, it also requires lenders to build customer relationships. In 2015, Rothesay Life provided a £300 million facility to Secure Income REIT, backed a portfolio of UK leisure assets operated by Merlin Entertainments, including Alton Towers. While the loan was in the process of being documented, an accident on a rollercoaster at the theme park left five people seriously injured, resulting in a £5 million fine for Merlin.

“We sat down with the management and appreciated the way they were handling a tragic situation and on that basis we got comfortable to carry on with our financing to Secure Income REIT, the landlord.”

A £220 million loan secured by nine motorway service areas in south-east England also became problematic when one asset from the portfolio was destroyed in a fire as the loan was due to be funded in late December. “Within three days, we were assured it was an insurable claim, so we went ahead and made the loan on Christmas Eve. Complicated issues happen, but it’s important to work with your borrowers in such situations.”

While those loans entailed financing platforms, recent business has been asset-specific and concentrated on more mainstream assets, namely central London offices. Despite the UK’s looming exit from the EU and the knowledge the real estate sector is due a correction, Haridas expects a continuation of the market conditions that have delivered large, prime financing deals.

“Globally, few markets have the benefit of long tenancies and strong rule of law. France, for example, has leases up to nine years, but it can be a more difficult jurisdiction for a creditor. London is also such an international city. One side effect of the Brexit vote is it has reduced the volume of development stock coming on-stream, so we have a low-vacancy market, reducing the impact of a supply-side shock exacerbating a demand slowdown.”

He refutes the suggestion values could drop sharply. “Today, the equities markets assume property values will drop by 30 percent, but I don’t necessarily think that is a base case. They would definitely correct in a no-deal exit but there is a natural floor because there are multiple buyers out there with significant committed funds to invest. NPS and LaSalle won the Plumtree Court auction, but they beat other real money investors who would still be interested if there was a meaningful correction in the property markets.”

The prospects for real estate debt remain positive, says Haridas, who points to maximum leverage for most senior lenders of 65 percent, meaning the industry benefits from a substantial equity cushion. The private corporate credit market, rather than property debt, is where potential issues are being stored up: “There are more than a trillion dollars of corporate, SME and triple-B leveraged loans issued within the private debt space and that is likely where we will see the defaults happen.”

Looking forward, insurance companies have a role to play as part of a diverse and conservative property lending market. Insurance capital, the former banker explains, is a natural source of financing for illiquid assets like commercial properties. “In the 1970s, apparently insurers had significant presence in the UK’s property lending market, then banks gradually stepped in and took 90 percent of market share. Things are gradually coming full circle.”