The market uncertainty caused by the covid-19 crisis is likely to lead to an increase in borrower demand for whole loan financing structures, according to Richard Craddock, managing director of LaSalle Investment Management’s whole loan programme.
The Chicago-headquartered investment manager, which operates its European real estate lending business from London, has raised an additional €300 million of investor capital to top up the €600 million raised for the strategy by May 2019.
Craddock told Real Estate Capital that LaSalle has seen strong demand among private equity sponsors in Europe for single-tranche loans of up to 80 percent. He argued that the reduced risk of sourcing a single, high-leverage facility, compared with arranging separate senior and mezzanine loans, will be highly valued by sponsors as they consider their financing needs amid current market conditions.
“From a borrower’s perspective, it is simpler to source a single, high-leverage tranche of debt than it is to take on two different loan agreements involving multiple parties, which requires more approval, multiple layers of diligence and an intercreditor agreement,” Craddock said. “Whole loans are a more straightforward way for sponsors to access higher levels of leverage.
“From our perspective, and the perspective of our investors, the benefit to the borrower of such a structure means we can achieve a compelling risk-adjusted return.”
He added that although such loans do not generate returns as high as those for mezzanine debt, whole loan margins – which comprise a blend of senior and mezzanine pricing – meet the expectations of investors in the strategy, which are understood to be around 3-5 percent IRR.
Through the vehicle, LaSalle originates and holds whole loans secured against a range of properties in Western Europe and the Nordics. Loans are usually above €25 million, with the company able to originate facilities larger than €100 million. Loan-to-value ratios can be up to around 80 percent.
In its most recent financing through the strategy, closed this month, LaSalle provided a whole loan to a joint venture between US investor The Carlyle Group and self-storage company Safestore Holdings. The loan financed the acquisition of, and capital expenditure for, a portfolio of six self-storage properties in Belgium.
According to Craddock, LaSalle focuses its whole loan lending on core, stabilised property owned by “institutional quality” sponsors: “Our competitive advantage is in offering leverage levels that banks are not able to.”
Craddock acknowledged that writing high-leverage loans during a time of market crisis brings additional risk. “We are definitely being appropriately cautious when underwriting deals and determining the right amount of leverage and risk profile,” he said. “Clearly, some real estate sectors are more affected by covid-19 than others, so we are selective, and the right structural protections can take some risk out of a new lending deal.
“For the right deal, sponsor and asset, we can still go up the leverage curve.”