CREFW-Fall2015

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CRE Finance World Autumn 2015
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Europe
W e all know the story: following the 2008 systemic
crisis, liquidity was scarce and there was an
established credit crunch across the whole economy,
which was particularly acute in the real estate sector.
The European CMBS market came to a halt, banks
lost appetite for property lending on their balance sheet, and the
post-crisis capital allocation requirements compounded this further.
In the wake of this new era, sensing an opportunity, a number
of new players entered the devastated property lending market
such as real estate professionals, former bankers, asset and fund
managers backed by family offices, off-shore capital and some
institutions, attracted by the opportunity to set-up boutique lending
operations, often with very-focused strategies. They were eager
to grow fast and their presence relieved some of the pressure in
the market by offering an alternative source of finance, which was
supported by the beginnings of a recovery in some markets. In the
UK in 2010, the alternative lenders’ market share across all sectors
was 11 percent, which grew to about 25 percent by 2014, with a
similar trend witnessed in continental Europe. Alternative lenders
are now present across the entire real estate lending market
providing senior, mezzanine and development finance, although
most tend to specialise in certain markets and products to match
their risk/return requirements.
We entered this market in 2008 with the launch of our first fund
focussed on commercial real estate mezzanine. We have since
launched a senior commercial loan fund (European) and a UK
development finance fund, supported by the growing appetite
from both investors and borrowers (property developers, asset
managers, real estate institutions, UHNWI). In total we have raised
over € 600m, across four funds, and have provided 125 loans for a
total of €1.5bn, consistently delivering returns in the low teens.
Figure 1
UK Real Estate Lending (2007–2014)
Source: De Montfort
The Market Recovery
During the past 24 months, the liquidity situation in Europe has
evolved substantially: base rates are at a record low, banks have
found a renewed interest in real estate lending (at least for the
prime and core assets) and CMBS is slowly reappearing, albeit in
a less aggressive format and in more modest volumes. As a result,
margins offered to borrowers are eroding, loan-to-value (LTV)
is going up, and real estate developers and investors often have
several financing options to choose from. This obviously creates
a new conundrum for the alternative lenders who were initially
attracted by higher margins and a reduced competition. Is the
party over?
We don’t think so. Alternative lenders are standing up to the
renewed competition and banks are not winning back the market
shares lost during the crisis years as easily or quickly as they
thought. Debt funds are still widely present in core European
markets, the UK, France, and Germany, mainly in residential, retail
and logistic sectors, but also in alternative sectors such as hotels,
self-storage and student accommodation. Their offering also tends
to focus more on mezzanine (tranches above 60 percent LTV),
development finance and short term bridges (before planning,
sale or a longer term refinancing). These are the areas where
mainstream lenders are typically less competitive due to regulatory
capital constraints.
To remain competitive at the higher end of the market, for larger
transactions (£50M +), debt funds are also increasingly keen
on loan syndications, where they syndicate the loan among
themselves or by teaming up with banks (using pari-passu
structures or senior/junior splits). This allows them to deliver
a comprehensive offering to their borrowers.
Figure 2
Real Estate Lending, European Market Shares (2014)
Source: C&W Corp Fi
Mikaël Limpalaër
Associate Director
Aeriance
Seb Sims
Associate Director
Aeriance