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Term Sheet: DWS’s junior lending strategy, Natixis’s bullish outlook, Brookfield’s quick spending

Asset manager DWS notes strong investor demand as it holds a first close on its junior debt fund; French bank Natixis says Europe’s lending market is weathering political and economic uncertainty; mega-manager Brookfield is deploying capital as quickly as it can raise it; and more in today’s briefing, exclusively for our valued subscribers.

They said it

The development of life sciences requires suitable real estate that meets the technical needs and uses of a community. Real estate in France today is not designed with this in mind”

Aude Landy-Berkowitz, executive director at Paris-based developer Novaxia, justifies the firm’s €1 billion partnership with Oxford Properties Group.

What’s happening

Junior opportunity
Frankfurt-based manager DWS, which launched a real estate debt platform in 2014, is targeting the subordinated property loan market with its sixth debt fund. Last week, DWS announced the first close of the vehicle, with capital commitments of €150 million. Through the fund, DWS is aiming to provide junior loans secured by high-quality, core and core-plus real estate, located across Europe. It will target a “high single-digit” rate of return and go to a maximum portfolio-level loan-to-value of 75 percent. The manager said it had received strong interest from institutional investors so far, with a total volume of €500 million targeted.

Recent data from affiliate title PERE shows debt, including junior loan strategies, is popular among investors [read more here]. According to the Q1 2022 fundraising report published this month, debt prevailed as the most popular strategy for the first time since PERE began tracking the data in 2008. Significantly, debt accounted for more than 34 percent of total capital raised globally during the quarter – easily the largest-ever percentage for the strategy over the past 12 years.

Limited impact
In a webinar last week [read more here], French investment bank Natixis argued the European real estate lending market is holding steady despite economic headwinds. Alexis Meunier, head of real estate for France, Benelux and Switzerland, said the French lender had seen limited evidence of any negative impact on lending from the Russian invasion of Ukraine – in terms of availability and cost of debt for borrowers. Debt funds, he said, still regarded property lending as “good and safe” compared with sovereign debt.

The bank, however, did not comment on what might change once the European Central Bank raises interest rates. But Natixis also said that inflation could increase by more than expected, and if that materialised this would result in further “aggressive” rate hikes. According to Dirk Schumacher, its head of European macro research: “A general replay of the 1970s is unlikely. But we could still have a longer period of inflation that takes longer to get under control [than expected].”

Office upgrade
There was further evidence last week that lenders will finance European office properties where they see a convincing business plan. London-based lender Starz Real Estate provided a €68.5 million loan to Union Street Investments, a long-term Dutch investment platform managed by Amsterdam-based adviser Spring Real Estate, secured by its portfolio of eight office buildings located across the Netherlands. The deal comprised €58.3 million to refinance existing debt, and a €10.2 million capex facility designed to fund upgrade works at the properties.

Maarten de Jong, partner in the debt and structured finance division of broker Cushman and Wakefield, which advised the borrower, said the lending landscape for value-add office portfolios is competitive. “We noticed there was ample liquidity available in the market as lenders recognised the strength of Spring’s business plan,” he said.

Watch this space
Kayne Anderson Real Estate Advisors, a Florida-based manager, closed the latest iteration of its debt fund series on 11 May with nearly $1.9 billion of capital commitments [read more courtesy of affiliate title Real Estate Capital USA here]. The firm, which plays in both the equity and debt sectors, exceeded its target of $1.5 billion to invest in student housing, medical office, and other niche sectors. While this latest fund is a US effort, the firm is expanding its lending platform into Europe via a venture formed last year with London-based student housing specialist Kinetic Capital. Kayne Anderson’s success of its latest US effort means the UK and European market might be hearing more from this manager.

Money in, money out
On the equity side, Brookfield Asset Management is deploying money almost as quickly as it can raise it. During the Toronto-based mega-manager’s Q1 earnings call last week, CEO Bruce Flatt told investors it has closed on $12 billion so far for its latest flagship real estate opportunity fund, Brookfield Strategic Real Estate Partners IV. The fund is the biggest currently open for commitments in the private real estate market this year, with an overall fundraising target of $17 billion. Brookfield has deployed $10 billion from the fund – all in Q1.

It is not slowing down either, announcing on 6 May it had purchased Watermark, a US hospitality REIT, for $3.8 billion from a combination of its funds. “We just continue to invest that fund,” Flatt said, adding that when the fund closes and is deployed, Brookfield will be quickly back fundraising again.


Incom-ing woes
Commercial real estate lenders are increasingly examining the resilience of income streams in a bid to pinpoint any potential economic exposure behind their returns and the risk of tenant defaults. This is an emerging trend as inflation and increased interest rates continue to impact various components of the real estate debt market. A MSCI report published last week highlighted how going beyond aggregate-portfolio analysis could help investors identify concentrations of risk tied to geographies, tenant industries and individual companies across their holding structures. Read more about this here.

Early impact
As the industry thinks about how to benchmark ESG KPIs, managers continue to figure out how they can make an impact. Nuveen Real Estate is literally getting in early. A new sector in the London-headquartered manager’s business is investments in community projects that are in their early stages, according to a statement. The hope is that a holistic approach to investments will have an impact on individual tenants and the surrounding areas they live in without compromising on returns.

“We are going beyond just affordable housing to focus our attention on community revitalisation,” newly promoted global head of impact investment and co-head of the new initiative Nadir Settles [his LinkedIn profile here], said. Settles will oversee the global impact business sector alongside senior portfolio manager of impact investments Pamela West [her LinkedIn profile here].

Investment surge ‘temporary’
There are plenty of reasons for private real estate investors to be cautious when committing capital to the market these days, including global inflation, the removal of fiscal stimulus, supply chain issues and the conflict between Russia and Ukraine. Yet, as CBRE’s Q1 Global Investment Brief demonstrates, none of that has stopped surging investment volumes.

In Q1, global commercial real estate investment grew 34 percent to $282 billion, the broker reports, with investment jumping by 47 percent in the Americas and 25 percent in Europe. Notably, volumes only grew 5 percent in Asia, muted by lower office investment. While noting the growth, CBRE dampened any optimism by predicting the macroeconomic and geopolitical factors mentioned should mean full year volumes fall short of last year’s record by about 2 percent, despite the best start to a year since 2011.

Data snapshot

Change is gonna come
Almost 40 percent of cities in North America and Europe have set ambitious net-zero carbon emissions targets, according to Savills’ latest impact report. In both regions, more than half of cities have some form of regulation, meaning repurposing and development opportunities in the region should be abundant.

Loan in focus

Londra hotel: a comprehensive refurbishment is planned. Source: Design Studio

A Florentine hotel loan
As the rebound in Europe’s hotel sector continues, another example of lender support for it was provided this week. Alternative lender Edmond de Rothschild REIM provided a €28.3 million whole loan to investment company Eurazeo for the refinancing and refurbishing of the Londra Hotel in Florence, Italy. The loan was provided through the Edmond de Rothschild European High Yield I Real Estate Debt Fund and a separate fund dedicated to a German insurance group.

Eurazeo bought the hotel, located adjacent to the city’s train station, in December 2020. It plans to rebrand as Indigo by Intercontinental. The re-opening of the hotel after the comprehensive refurbishment is planned for Q4 2023. The loan was Edmond de Rothschild REIM’s first for its lending strategy in Italy and in the hospitality sector.

Today’s Term Sheet was prepared by Daniel Cunningham, with contributions from Lucy ScottSamantha RowanJonathan Brasse and Peter Benson.