Why ARA Venn sees opportunity in whole loans during the covid-19 crisis

The UK-based investment manager has held a €200m first close on its second whole loan fund.

Real estate whole loans will appeal to property owners and investors as they encounter uncertain financing conditions due to the covid-19 crisis, according to Paul House, joint managing partner and head of the commercial real estate team at ARA Venn.

The UK-based investment management firm – renamed from Venn Partners in March when Asian asset manager ARA bought a majority stake – has held a first close on its second whole loan strategy, bringing the total capital raised for the vehicle to €200 million.

“In a more uncertain funding market, borrowers are keen to minimise execution risk,” House told Real Estate Capital. “Therefore, the ability to secure whole loans versus having to raise a senior and a separate junior loan is very appealing.”

ARA Venn secured capital commitments for VeCREF II from cornerstone investor ARA, as well as all the institutional investors from its predecessor fund. This vehicle held its final close in 2015 and deployed more than €520 million across 24 commercial real estate loans. It was focused on the UK and selected western European commercial property markets.

Through VeCREF II, the firm will invest in whole loans secured against a range of properties in western Europe, targeting a net IRR in the mid-to-high single digits. It will aim to write loans secured by value-add real estate across all property types, with a focus on France, Germany, Ireland, the Netherlands, Spain and the UK.

Although the covid-19 crisis has slowed down decision-making processes, it did not prevent ARA Venn from raising part of the €200 million during the lockdown period. “Challenges faced by LPs were the ability to convene investment committee meetings in a remote setting at a time where everyone was extremely busy assessing the impact of the pandemic on their existing portfolios or having to convene due diligence meetings over the phone instead of the usual onsite approach,” House said.

However, the firm said the overall target size for the fund will depend on how the crisis affects fundraising conditions.

House argued that the current market environment boosts the strategy’s chances of success: “We believe the fund will be attractive for LPs, given the timing of our deployment and the fact that we won’t have any pre-covid-19 legacy assets in the portfolio which could look mispriced or too risky in today’s environment.”

House argued that current market conditions favour those with an appetite to lend. “Since the outbreak, a number of lenders have stopped lending as they are busy working on their existing portfolios,” he said. “Those lenders that are still active are taking into account the risks that have arisen from the pandemic, leading to a rise in margins and an improvement of credit metrics.”

However, he acknowledged that assessing new investment opportunities during times of crisis presents additional challenges. “It is clear that the full impact of the virus on the economy and the real estate subset has yet to come through, and therefore careful consideration needs to be taken when assessing new opportunities.”

While recognising some of the market risks brought on by the pandemic, House added that debt is an attractive proposition for investors, given the downside protection it provides: “Whole loans have the added advantage of providing senior ranking security versus mezzanine loans, whilst still delivering attractive returns and regular income distribution.”