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Starz’s Arzi: Institutions are optimistic about European real estate debt

Following Starz Real Estate’s sourcing of Middle Eastern funding for its credit platform, the firm’s chief executive says the European lending market is increasingly attracting the interest of global investors.

More global institutional investors are exploring opportunities in the European real estate debt space due to its strong credit performance and low volatility, according to David Arzi, chief executive of London-based alternative lender Starz Real Estate.

In February, the pan-European debt platform secured funding from a Middle Eastern sovereign wealth fund with which it aims to originate up to €900 million of property loans within the next two years. Structured as a fund – Starz Zenith Capital – Starz said the mandate will complement its existing strategy to originate mid-market loans of between €15 million and €75 million with loan-to-value ratios of up to 75 percent.

Loan pricing will start at 3.75 percent and target returns are in a 10-12 percent range.

Speaking to Real Estate Capital Europe, Arzi said returns on offer in the European real estate credit space are not too dissimilar to real estate equity. “Equity has substantially higher levels of risk and all the capital that has gone into real estate equity has driven returns down,” he said. “Therefore debt looks pretty compelling as an alternative investment.”

He added that the smaller scale of Europe’s real estate lending industry, compared with the US, is a source of opportunity for investors. “The credit markets in the states are just a lot larger, especially the public markets. There’s a lot more liquidity. I think Europe still has some levels of inefficiencies, which enables you to get some extra yield that is probably hard to find in the US market.”

Interest in real estate credit is coming from a range of institutional investors, including managers of sovereign wealth capital, Arzi said. He added that, while investments in real estate debt traditionally come from investors’ fixed-income allocations, they now also arrive from institutions’ real estate equity teams, which have a more dedicated focus on the asset class.

“It is an easier fit on the real estate side,” Ariz said. “They already have the knowledge of the underlying asset. There are also differences between corporate credit and real estate credit.”

Lending opportunities

Starz, which launched in July 2018, is in the early stages of sourcing an allocation from an Asian pension fund for the Starz Zenith fund, which Ariz said further signals the growing appetite from global investors for European capital markets.

Arzi argued that, while the pandemic has created a “challenging commercial landscape”, it has also led to significant new real estate lending opportunities as assets change hands, require recapitalising, or need finance for upgrade projects to suit new end-user requirements. Through the new Guernsey-regulated fund, Starz will target loans for acquisition and recapitalisation of high-quality, value-add assets across the eurozone and UK.

Starz’s lending deals have included a €17 million loan in January to sponsors Mm Capital and RoundShield Partners for an office building in Dublin. In the same month, it provided a €31 million loan to finance the acquisition of a student housing asset in Porto, Portugal, by Brookfield company Temprano Capital.

Arzi added that, as the sector emerges from the pandemic, property sales activity is up, creating demand for acquisition financing. He added that the commercial real estate collateralised loan obligation issued last November, which securitised a portfolio of Starz’s loans, further demonstrates investor liquidity for real estate debt.

“On top of that there’s been bank retrenchment in Europe, and when you add these factors together the investment thesis around real estate credit has become very compelling,” he added.