Term Sheet: KKR’s lending plans, Moody’s warns of refinancing risk, debt’s enlarged share of fundraising

KKR prepares to lend in Europe as managers seek opportunities in a volatile market; ratings agency Moody’s highlights enhanced refinancing risk in its latest paper; debt’s share of real estate fundraising grows, but volumes drop overall; and more in today’s briefing, exclusively for our valued subscribers.

They said it

“You cannot get rid of your book within a week, or a month”

Isabelle Scemama, global head of AXA Investment Managers Alts, on why the market has not yet seen forced selling of real estate assets, speaking on Bloomberg TV.

What’s happening

European expansion: KKR’s Ali Imraan (right) and Matt Salem are eyeing significant growth in the New York firm’s credit business on the continent (Credit: KKR)

KKR’s path to scale
Market dislocation is expected to generate opportunities for non-bank lenders in Europe. Mega-manager KKR is among those aiming to capitalise. The New York-headquartered firm has been building a European real estate credit team, led by former LaSalle Investment Management executive Ali Imraan, who joined in January as head of European real estate credit. The platform now has a four-person team in place and is ready to begin lending, Imraan and head of real estate credit Matt Salem told affiliate title PERE.

KKR is eyeing $1 billion to $2 billion in originations in the region next year, with an intention to add further scale to that transaction volume by multiples over time, according to Salem. To build the platform, KKR is spending time on forging relationships with the borrowers with which it wants to do repeat business. “Ultimately, that’s your path to scale,” Imraan explained. And while the firm has fresh capital and is eager to lend in Europe, Imraan said it is important to proceed at a measured pace. “For us, building those relationships is way more important than doing a particular deal.” Check out our coverage here.

HIH hits lending scene
There was further evidence from the German market of managers turning their attention to debt too. HIH Real Estate, a Hamburg-headquartered real estate manager, told trade publication PropertyEU that it is embarking on its first lending strategy. Heino Betz, its head of debt, predicts that “in the near future, debt yields will be higher than equity yields”. Debt vehicles, he said, will become “more interesting and more necessary” as banks shy away from risk. Betz did not disclose how much capital had already been raised, but HIH is targeting a volume of between €300 million and €500 million when it launches in early 2023. “Debt funds and banks will not be competitors at all, rather they will, whenever necessary, complement each other to complete the chain of economic value,” he told PropertyEU.

Big bang in lender universe
Capital raising for debt vehicles reached an all-time high of €12.2 billion in 2021, a year-on-year increase of 26.7 percent, according to industry body INREV. Its research, released last week, also revealed the non-listed European debt universe grew to €60.3 billion of target equity, double its size five years ago. Iryna Pylypchuk, director of research and market information at INREV, told Real Estate Capital Europe that debt funds have an opportunity to step up to fill the funding gap, especially in relation to ESG-focused strategies: “Financing the upgrading and retrofitting of much of Europe’s property market will be a big task, strategies traditional lenders tend to be on the sidelines of due to reporting and regulations. This presents a scalable opportunity for non-traditional lenders.”

Risky business
While there is clearly appetite from non-banks to launch real estate debt strategies, Europe’s financing market is undoubtedly riskier. In a research paper last week, ratings agency Moody’s warned rising rates will weaken property values over the next 18 months and increase refinancing risk. If the refinancing of debt fails, said Moody’s, creditors face the risk of losses as they enforce their security and try to liquidate the property in a depressed market. It added that the risk of sponsors defaulting during their loan term is lower than when they need to refinance, partly due to most European rental contracts allowing for inflation-linked rent increases, which support sponsors’ ability to service their debt. However, Moody’s said deteriorating economic conditions will increase default risk.

A hopeful note for offices
In its latest research – read here – Paris-based manager AEW reported that European office markets are beginning to “rebalance” following the widespread introduction of working-from-home and hybrid work practices since the onset of the covid-19 pandemic. AEW reported that while concerns over the impact of remote and hybrid working are reflected in discounts to net asset value for European office REITs, occupier market indicators show a solid recovery from the covid crisis, with take-up almost 50 percent up from its Q3 2022 low point, prime rental growth positive since Q4 2020, and the vacancy rate stabilised at just below 7 percent. Question marks remain over how demand for workspace will hold up in the coming years, but AEW’s findings may provide some relief to lenders with exposure to the sector.


Debt takes a greater share
According to PERE’s Q3 2022 global real estate fundraising report, the rising interest rate environment has led investors to back debt funds in almost record numbers. Debt funds made up 26 percent of fundraising to the end of Q3, the second highest proportion ever recorded by PERE. If debt fundraising is maintained until the end of the year, only 2017 will have seen a higher proportion of debt funds raised. However, overall real estate fundraising was down. The amount of capital raised in the first nine months of the year was just over $107 billion – the smallest amount raised in the sector since 2013. Last year, the final number was bolstered by a record $69.6 billion raised in Q4. While there are certain mega-funds still in the market, it is not likely this year will witness a repeat of the yearly record. Check out the full report here.

Energy crisis
Since the beginning of the Russian invasion of Ukraine, an energy crisis has gripped much of Europe. According to research released this week from Paris-based proptech firm Deepki, more than half of European managers have seen a more than 50 percent increase in energy costs. The survey of more than 250 managers on the continent found that just under 20 percent have seen increases of up to 90 percent. One silver lining is increased demand for sustainable buildings, meaning a premium on pricing for them – more than half of respondents, 56 percent, said they had seen an increase in pricing of between 11 percent and 15 percent for energy efficient buildings.

Data snapshot

A quiet quarter
The European real estate investment transaction volume for the third quarter of 2022, at €53 billion, was down 37 percent in comparison with the same period last year, according to data provider MSCI. Only senior housing and the care sector showed a positive change in deal volume.

Loan in focus

EDGE Südkreuz Berlin: built using a wood-hybrid construction method. Image: Michael Mann Photography

At the cutting edge
Bavarian bank MünchenerHyp last week announced it provided a €141 million loan to finance the purchase of what it called Germany’s most sustainable building. The facility was provided to the Düsseldorf-based private equity investor COLCAP and is secured against the recently built EDGE Südkreuz Berlin in the German capital. The complex contains the ‘Carré’ and ‘Solitär’ office buildings, which were built using a modular wood-hybrid construction method. The ‘Carré’ building is the new German headquarters for energy supplier Vattenfall.

The project received the DGNB Platinum award from the German Sustainable Building Council with a total compliance rate of 95.4 percent – the highest ever for a new construction project. “The financing of EDGE Südkreuz Berlin is a prime example of our long-term strategy to accompany our customers to the greatest extent possible as the sole underwriter for large-volume core investments in Germany that have high sustainability standards,” said Louis Hagen, chief executive of MünchenerHyp.

Today’s Term Sheet was prepared by Daniel Cunningham, with contributions from Lucy ScottEvelyn Lee  and Peter Benson.