Allianz Real Estate has grown its European loan portfolio to €10.6 billion at year-end 2020, an increase of about 15% year-on-year, said the company.
The real estate investment subsidiary of the giant German insurer Allianz Group made €1.9 billion in new investments during the year, with capital deployed by its Luxembourg-based European Debt Fund Parec rising to more than €4 billion, an increase of one-third.
In total, the company's European loan portfolio is now spread across 12 countries in the region, including a logistics transaction in the Czech Republic - a €185 million stake in a joint deal to refinance a logistics and industrial portfolio managed by CTP - which closed in December.
According to Roland Fuchs, Head of European Debt at Allianz Real Estate. "Despite the Covid 19 pandemic and related challenges in 2020, we were able to create attractive financing opportunities with improved risk-return profiles, resulting in our European credit business steadily growing in size and geographic footprint." He said the company had both increased its assets under management, and had not experienced any defaults from its clients.
At the beginning of the year, even before the outbreak of the pandemic, Allianz’s European financing team had taken the strategic decision to increase the proportion of investments relating to renovation projects and development financing. The plan was to address investors' growing appetite for ESG-focused loans while financing forward-looking offices – “centrally located, sustainably operated "smart" assets that focus on user experience and well-being with a range of value-added services,” as Allianz described it.
In May, Allianz Real Estate secured its first third-party client for its Luxembourg loan fund. Bayerische Versorgungskammer (BVK) took a €300m stake in a sub-fund with a total volume of €1.2 billion together with Allianz.
This led to a series of deals, including a €200 million "green loan" for the development of the Arboretum in Paris, the largest solid wood office complex in Europe. Further deals followed – to Helical in London, to Blackstone for two developments in Amsterdam, and €250m to Tishman Speyer for the Tour Cristal in Paris – all prime transactions, and increasingly structured as ‘green loans’ according to LMA standards.
With the classical bank lenders holding back from aggressively expanding their books, and largely restricting their lending to core and core-plus assets with a maximum of 55% loan-to-value, debt funds are enjoying a heyday right now, with several big players having recently launched their offerings on the European market.
Edmund de Rothschild has just closed on its debut fund, a €300m vehicle which is offering whole loans, mezzanine financing and preferred equity for both existing assets and project developments. Fund manager Ralf Kind told REFIRE that about a third of the fund was earmarked for German transactions. He said demand was so high, from both investors and potential borrowers, that he already had a pipeline of about €600m, so the start of the second fund is imminent.
According to René Höpfner, CEO at LaSalle Investment Management, the market volume in Europe of private debt funds has increased by three and a half times over the past ten years, since the introduction of stiffer lending and liquidity regulations for the banks in the wake of the financial crisis. This opened up a gap which debt funds have been increasingly filling. The COVID pandemic has basically just accelerated this trend, with non-banks now accounting for about 9-10% of European real estate financing, says Höpfner.
LaSalle Investment Management recently closed its first European debt fund (LREDS IV) Its first closing of €435m in commitments puts it on track for a total capital raise of €1bn, mainly from European and Asian pension funds and insurers. It is focusing on mezzanine debt and whole loans across all asset classes in Germany, the Netherlands, the UK, France and Spain.
Another new entrant in Europe is US giant Invesco, which recently took over the real estate financing business of Swiss asset manager GAM. Invesco managing director for Europe, Andy Rofe, said of the move, d “What we wanted to do was have the capability of investing in the real estate debt universe in Europe, which we didn’t have previously... (GAM) is a natural adjunct to the business. We have that full capability of public, private, equity and debt in the US, and wanted to complete that offering to clients in Europe as well.”
Also eyeing up the European market is London-based alternative asset manager Cheyne Capital, which is thought to be targeting up to €1.5bn for the latest in its eries of real estate debt funds. Cheyne is thought to have already raised Stg500m in a first close for series VI and VII of its CRECH suite of funds (Cheyne Real Estate Credit Holdings).
Cheyne too targets gaps in the market left by the withdrawal of traditional debt providers. It is currently focused on borrowers requiring finance for value-add, transitional or development projects, mainly in the UK, France and Germany. With debt for these assets currently in short supply, Cheyne believes it can get strong risk-returns from senior lending where it will have first
charge over the property, although it is able to lend higher up the capital stack. It has already made loans on its new debt series – two in the UK and one each in France and Spain.
In Germany, Helaba Invest has also just raised €150m for its Multi-Manager Spezialfonds, which will invest in senior whole loans and mezzanine products. It expects to participate in between 100 and 150 separate financings over its scheduled eight year duration, and is targeting a return after costs of 6% - 8%.
It certainly looks as if the European market for debt finance is set for a lot of further growth. The advantages for borrowers are the perceived speed of decisions, flexibility and certainty of execution, while premature repayments are less expensive than with banks, along with greater clarity on necessary capital expenditure.
Investors in debt funds gain from attractive risk-return profiles, with yields of 3-4% on senior lending with 60% LTVs. On 60-75% LTVs, gross yields can be as high as 7-10%, as well as giving them the extra cushion of the investors’ own equity capital ahead of them in the capital stack.
Additionally, for insurance companies and pension funds, their investments are treated more favourably under Solvency I and II regulations than would be their direct investments. Hence the BVK’s decision to partner up with Allianz (see above), which will see it taking a quarter of the loans issued by Allianz. These will be issued with LTVs of between 50% and 60% across Europe, with a target return of 2.25-2.5%, reflecting the core-nature of the targeted assets.
Higher returns are available in mezzanine funds, such as those of Corestate subsidiary HFS, which are offering up to 10% in its €1.3bn property development fund which only provides mezzanine tranches on 90% LTVs – a market much in demand in these corona-ridden times. The HFS fund is expected to expand into offering whole loans this year.
