Montreal-based pension fund subsidiary Otera Capital and investment bank RBC Capital Markets, part of Royal Bank of Canada, have provided a £525 million (€605 million) loan facility to support the development of a five million square feet logistics portfolio owned by St Modwen, the UK logistics and industrial investor and developer.
The transaction is the first European real estate loan for Otera, the real estate lending subsidiary of Canadian pension fund Caisse de dépôt et placement du Québec as it seeks further lending opportunities in the UK market.
The five-year loan, which was arranged by RBC, will finance the development and investment phases of various logistics schemes, mainly located in the Midlands. The structuring of the facility means the lenders can achieve an attractive risk-adjusted return through the life of the loan, benefitting from a higher margin at the outset but also offering the borrower margin reductions is the portfolio is leased up.
St Modwen, which owns and manages a 10 million square feet logistics portfolio, has consent to develop 7.3 million square feet, according to its website.
Axel Brinkmann, European head – real estate capital partners and real estate corporate banking for RBC, told Real Estate Capital Europe the structure, which he describes as a “hybrid loan”, was characteristic of loans the bank has provided in the past.
“A bigger development component at the beginning of the loan term means you can generate very attractive returns. RBC and Otera Capital are focused on finding larger and slightly more complex situations to produce higher-yielding returns rather than simply being a commodity lender. This type of approach is always in demand from borrowers but not every lender – especially debt funds – can provide it because some do not like offering the margin step-down element. But in today’s market you need to be innovative.”
RBC helped finance US private equity manager Blackstone’s £1.3 billion take-private of St Modwen in June 2021. It also had an existing relationship with Otera Capital, with which it has previously partnered in direct lending transactions in the US and Canada.
Brinkmann said in 2024, the Real Estate Capital Partners business of the Toronto-headquartered lender would seek to take advantage of “pockets of illiquidity”, particularly for new investment. “There is not a lot of new lending being deployed and investment volumes are very low which is why we also currently see very competitive margins being offered, particularly in stabilised residential and logistics which are the sectors still favoured by investors and lenders.”
Otera Capital, which has a £17.3 billion real estate loan book in Canada and the US, has been in discussions with RBC about partnering on a UK real estate loan since 2019. But Paul Chin, executive vice-president and chief investment officer at Otera, explained the process of adding the UK to its direct real estate lending activities needed to be a considered move.
“When we expand into a new market, we undertake a lot of deep dive research work to understand the market, evaluate the opportunity and impact on our portfolio. One area we had to consider is Brexit and have been waiting to see what impact that would have,” said Chin. “Today we are managing our liquidity very tightly, but the UK is an interesting market for us because it provides us with geographic diversification at attractive risk-adjusted returns. We are issuing this loan at a moment of strong conviction about the sector, borrower and the market.”
Otera, which was created by Caisse de dépôt et placement du Québec in 2008 as a dedicated property lending subsidiary, said UK real estate values have adjusted faster than other markets. Chin said: “When you are investing across different markets you have the benefit of seeing common trends and correlations. The UK has repriced faster than in North America. While price discovery is still ongoing, the gap between sellers and buyers is not as wide as it is in other countries.”
Chin explained because the lender does not have an office in the UK it wanted a partner with an organisation with a knowledge of the market: “RBC has meaningful capital at risk in deals and this provides us with property alignment. We really like the way they view credit risks and structure loans to generate more risk-adjusted yield.”
He added UK logistics assets with high environmental credentials were appealing to the lender as development activity slows and large corporate occupiers seek the greenest industrial assets to reduce operational costs. Almost one fifth of the UK’s current industrial stock will fail to meet minimum Energy Performance requirements by 2027, according to property consultant Knight Frank.
Brinkmann added development with high environmental credentials, such as high Energy Performance Certificate ratings and BREEAM ‘Excellent’ ratings, would attract the strongest occupational demand in the medium-to-long term.
“As a lender we take more leasing risk on high-Energy Performance Certificate developments due to this strong conviction that those assets will be the best product in a sub-market,” Brinkmann added. “While we have observed some slowdown in rental growth due to the economic backdrop the fact remains there is not much top-ESG logistics space in the UK.”
Chin said Otera was now seeking further opportunities, adding that having no previous exposure to the UK meant it was well-placed to take advantage of “market dislocation”.
“No one anticipated the increases in interest rates we have seen in the last 18 months. Even for core assets, debt service is an overriding constraint,” he said. “It is difficult for lenders with meaningful exposure in a market going through a difficult time to capitalise on an opportunity if they are too busy dealing with problems in their existing portfolio.”