The borrower view: Europa’s Belinda Chain

Europa Capital’s head of asset finance on why loan terms must give companies the scope to carry out business plans

Sourcing debt to support real estate investment strategies across Europe requires knowing the local banks that are most willing to finance property in their home countries. This is the view of Belinda Chain, partner and head of asset finance at investment manager Europa Capital. As its name suggests, Europa takes a continent-wide approach to property, including providing finance to other companies through its debt fund series. However, most of its activity is equity investment, for which Chain finds and manages the necessary debt from third-party lenders.

That means organising finance for investment strategies with varying risk profiles. Europa is purchasing assets for its €716 million Europa Fund V, for which it makes value-add investments. It is also making investments for a core diversified income strategy and a UK joint venture with student accommodation provider Generation Estates. Real Estate Capital caught up with Chain for her view on Europe’s real estate debt markets.

What role does debt play for your business?
We use debt across almost all our investment strategies, because it is accretive to our fund returns. However, it needs to be carefully managed, because all debt comes with an element of risk. Our borrowings are centrally managed and we take a top-down approach, meaning we set a leverage strategy at the outset for any fund or investment initiative.

As a borrower across multiple European markets, how do you source debt?
We start by going to the local banks, simply because they understand the location of the property and, hopefully, the reason we have made a particular investment. If a lender does not understand your rationale, it is difficult for them to get the loan terms right, especially when it comes to value-add projects.

Local lenders tend to have the greatest understanding of local assets. Copenhagen is a great example. We have bought a lot of residential there, and Danish banks have a large appetite to lend against the city’s property. There are, however, some fantastic international lenders who will lend across several jurisdictions, including German and French banks. The problem is, there aren’t as many pan-European lenders as there used to be.

We are mainly financed by banks. But it is good to see non-bank lenders increasingly willing to transact in continental European markets – especially in deals for which bank lenders have limited appetite, such as development.

How liquid is the European real estate debt market?
Several types of lenders – banks, insurers, alternative lenders – are offering different types of finance.

The financial broker model has also gained traction, meaning firms without in-house finance teams can turn to people with expertise to source debt for them. So, it is generally a liquid market, provided the price expectations of the debt provider match the sales expectations of vendors.

It is a good time to be a borrower in the core property space. We are in an amazingly low interest rate environment, with the 30-year rate for both sterling and the euro well below 2 percent. It is cheaper debt than we may see again.

What difficulties do borrowers face?
Debt for certain investments in the value-add space can be in short supply. There is a lack of lenders prepared to take refurbishment or redevelopment risk. They still want pre-lets, but occupiers are less inclined to forward-commit to properties than in years past.

The lack of truly pan-European lenders is also a challenge, especially for our pan-European strategies. Finding lenders willing to write loans which span different jurisdictions without needing to silo debt into country-specific facilities can be tricky.

Having an umbrella facility with a single lender helps keep management costs low in order to maximise distributions to investors.

How would you like to see lenders improve?
I’d like to see lenders issue binding terms earlier in financing processes. A result of the financial crisis is no-one wants to commit to a deal until the last minute, and that can make it difficult to navigate the expectations of buyers and sellers. It also makes it more difficult to give a lender exclusivity in a deal, in case they pull out.

What do you look for when structuring a deal?
For the value-add strategy, we need to tailor each loan to the underlying business plan.

Flexibility in covenants is important. If an operational asset needs to be closed while improvements are made, it might mean there is no income temporarily, so covenants need to reflect that. We also look at the detail behind the covenants. For example, we will ask how net rental income is calculated. It’s fine to have an income coverage ratio covenant, but if the definition of income is too limited, it can be a problem.

When we are sourcing senior debt for core strategies, it is almost entirely price-driven. In core strategies, distribution to investors is key, so loan pricing is crucial, although we will also consider factors such as substitution rights, so we can add or remove properties from a portfolio.

Lenders’ hedging strategies can also be a factor. Hedging can be very lucrative for lenders, but it is often not beneficial for borrowers.

We target well-informed lenders who are not just aiming to cross-sell products. They understand the risks of the market we operate in and how to tailor the facility to those risks.

How has the European real estate lending market changed since the
last cycle?
It is far more regulated, and most lenders take a cautious approach. As investors, we aim to build resilient portfolios and lenders seem to be taking the same approach. There may be elements of the market where loan-to-values are creeping up, but the traditional lenders are not lending anywhere near the leverage points we saw up to 2007.