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AXA Real Estate Investment Managers’ debt investment business is “closely monitoring” the market with a view to potentially beginning to make mezzanine loans.
Up until now, AXA Real Estate’s market-leading €7.9bn property and infrastructure debt platform has invested purely in senior debt.
Charles Daulon du Laurens, AXA Real Estate’s head of investor relations for real asset finance, said: “We are monitoring the market very closely to see whether it would make sense to be in other parts of the capital stack (in addition) to the senior”.
He said that the business already has the capital and the flexibility to make mezzanine loans if the opportunity is there.
Referring to a period between 2007 and early 2009 soon after the debt investing business was established, when margins on senior debt were very low and AXA invested instead in AAA CMBS, he added: “One characteristic of this platform is that it has always tried to be agile”.
“The team has identified situations recently where the senior is wrongly priced (for us) but the mezzanine could be tranched and well priced. If we see more of these, we may invest”.
If the platform does expand this way, Daulon du Laurens said it would not be via a whole loan strategy where clients with a senior loan risk-return strategy and others with a higher-risk return strategy invest in the same loan.
Three weeks ago, AXA Real Estate won a €485m senior debt investing mandate for five Danish pension funds.
The mandate grew out of an initial decision to invest in European senior loans by Sampension, over 12 months ago. “Then the conversation evolved towards a few Danish pension funds gathering up a potentially larger sum, given they are like-minded investors”, Daulon du Laurens explained.
The other four pension funds are AP Pension, TDC Pension, JOP and DIP and the five have set up a vehicle called the Kronborg Fund.
M&G Investments and Agfe are thought to have been among the rivals pitching for the mandate.
Kronborg will invest in large senior loans alongside other clients in the AXA Real Estate debt stable, targeting office, retail, logistics and hotel investments, mainly in the UK, France and Germany.
Daulon said the co-investment opportunity and the size of the platform and hence the size of the loans AXA can make for its investors “was key” to the Danish pension funds’ decision, because larger ticket sizes can often command better returns. “It is all the more true in the context of the increased competition among lenders”.
Jane Roberts, editor
The 400-odd fund managers and investors at INREV’s annual conference in Berlin last week were definitely in a perkier mood. Asian and US capital is flooding into Europe; economies and property markets are recovering; there were complaints about the difficulty of finding deals and talk of bubbles and being out-priced in London and Spain.
As Jacques Gordon, global investment strategist at LaSalle Investment Management put it, “too damn much money is channelling real estate”, and it’s concentrating on a narrow range of locations and property types.
This is definitely the case for big money. Canada’s PSP is sticking to direct investments with local partners in core and value/added real estate with a CBD focus. “Europe is cheap relative to the US”, said the pension fund’s md of real estate investments, Stéphane Jalbert. On the other hand, Australian Superfund QIC is “rotating out of some core markets” and leaning towards value-added opportunities, debt, and long leases, said its director of global multi-asset, Sonya Sawtell-Rickson.
In contrast, Wellcome Trust’s Peter Pereira Gray provided a dose of cold water. He’s staying away from commercial real estate. “We are building up our holdings in technology and venture capital, where the returns are more exciting.” Welcome has been loading up on residential real estate, where the “demand/supply argument is overwhelming” and depreciation not such an issue.
This year’s pow-wow was titled “Real estate is coming back to life” but on the current showing, the European private fund industry still seems pretty fragile. “Will investors find faith in funds again?” was one session’s conundrum. (True answer: some will, especially smaller ones who have no direct way into real estate.)
INREV’s own approach to the question is ambidextrous. On the one hand, it’s proselytising for the fund model: its guidelines have been revised, so there’s more on corporate governance, more frequent reporting, and how to deal with thorny issues like fund extensions and windings-up.
On the other hand it’s extended its remit to other structures like joint ventures and clubs. This is where the big money has fled, post-crisis. The likes of Blackstone aside, it’s not easy to raise capital for an unlisted fund. Regulation has brought bigger costs, and there’s more consolidation on the cards.
And then there’s performance. Prof Andy Baum of Property Funds Research blitzed through his findings on investing via core, non-listed funds. The good news was that (between 2001 and 2012) they outperformed bonds and IPD but not listed property. They didn’t provide an inflation hedge, but delivered “not horrendous” real returns of 3%.
The bad news is that the core funds that he tracked provided on average, negative alpha of 1.5%. The silver lining is that 39% of them did provide positive alpha, the best being nearly 10%. The damage, but not all of it, is leverage – which in core funds is pretty low.
This provoked a lively discussion of fee structures, which Baum termed “horrendous”. “I’d love to see a fee structure that disaggregates leverage, alpha and beta”, he said. Fund managers told of proposing the like and being turned down by investors, and consultants were also thought to need “a bloody good kicking”.
These industry issues aside, there was plenty of big-picture stuff to mull over. Cities are a major theme: Harvard prof Edward Glaeser provided a high-speed international tour d’horizon arguing that cities make us wealthier, smarter, greener, healthier and happier. His best line: “Is Paris a gated city?” Discuss.
The city theme was echoed by Jacques Gordon, who recommended investors to focus on “DTU” for outperformance – demographics, technology, and urbanisation. This means primary cities (getting larger and richer), tech cities (Cambridge, Toulouse) and urban tech locations: “Shoreditch not Reading”.
Alex Catalano, consultant editor
Conventional wisdom suggests that commercial property investment suffers when government bond yields rise, but according to leading industry players, there are some important mitigating factors to support returns – at least for the next year or so.
At an AEW Europe economic briefing in London yesterday, the firm’s head of research Sam Martin said there are clear signs now that bond yields are starting to rise, which will put “upward pressure” on property yields over the long run.
But Martin declared that increasing investment allocations to core property would help offset any negative yield shift, especially given the current under-supply of prime office stock, a limited development pipeline and the prospect of rental growth.
Evidence of rental growth starting to come through is central to Martin’s argument. He pointed out to the 130-strong gathering in London’s Centre Point, that income yield has become a proportionately bigger – and more stable – component of total returns for commercial property.
Andrew Strang, former Hermes Real Estate chairman and now a consultant to Norges Bank Investment Management, said: “In general terms it’s a good thing for bond yields to be rising modestly because it implies that the whole economy is now back on track, and that’s good news for property.”
Strang added: “I see bond yields as artificially low at the moment and I think the market can cope if they go back up to 4.5% or 5%. I think that’s been in many investors’ minds over this past five-year period. But if yields were to go to 6.5%, 7% or higher, then I think that does do some quite serious damage to the property market.”
Rob Noel, chief executive of Land Securities, said the industry’s response to “a structural under-supply” and tentative signs of rising occupier demand would be a greater determinant on investment performance than the current bond rate and interest rate environment, which he predicted would be “pretty benign” for the next two years.
Noel added: “I think the biggest influence on the market is the fact that requirements from occupiers are changing, both occupiers of office space and occupiers of retail space. If you have got the right product you will get really quite good rental growth. But if you’ve got the wrong product, it will go backwards.”
The rising bond yield debate is also destined to be skewed by political posturing in the run-up to next year’s general election, according to Ian Marcus, senior adviser at Eastdil Secured. Marcus suggested that property investment is vulnerable to “political risk”, a bigger potential impact in the coming year, he said, than rising bond yields. The risk lies in “what the politicians do – any of them – in their naivety … in an attempt to get elected”.
If anything, AEW’s Martin suggested, it is deflation that casts the longest shadow over property across Europe. “Deflation is a real risk and we’re likely to see lower rates for longer. So, that heat on rising government bond yields pushing up property yields is not likely to happen for a few years,” he concluded.
CBRE Loan Servicing has appointed Nikolaus Choina to lead the firm’s German operations, supporting Clarence Dixon and Piotr Tokarski.
Dixon, CBREL’s head, has been looking for someone to run and help expand the business in Germany since he took over a year ago.
Choina, a German national based in Frankfurt, has both loan servicing and real estate experience. He worked at LNR Germany, the US debt investing business and sister company of European loan servicer Hatfield Philips, and then at Auction.com.
CBRELS currently manages around £3bn of performing and non-performing loans in Germany. The largest are in Project Chamonix, an €800m portfolio acquired by Marathon Asset Management at a c50% discount from Lloyds in February 2013, and the €2.2bn Vernal loan, owned by Apollo Global Management and a syndicate of German banks, secured on more than 20 assets.
Dixon is also targeting loan facility agency business from German banks. “We are very pleased to get Nikolaus and we will also be hiring a second person based in Frankfurt”, he said.
CBRELS should be in pole position to be confirmed as the loan servicer for Marathon’s second continental NPL acquisition from Lloyds, Project Aberdonia, with a face value of €590m. That sale is due to close shortly and Marathon is also buying that portfolio at a c50% discount. The main borrower of both the Chamonix and Aberdonia loans is Mark Steinberg’s Marcol Group. Dixon declined to comment on Aberdonia.
European loan servicing continues to see a high level of people moves as the new and established firms jostle to win new business as CMBS work declines. In January, newcomer Mount Street – co-founded by CRBRELS’s former head, Paul Lloyd – took over Morgan Stanley’s loan servicing team and its €3.3bn of remaining CMBS loans and €2.1bn of other senior and mezzanine loans and agency mandates.
US property business Auction.com has closed its European operation which was based in Germany after disappointing levels of business.
Jane Roberts, editor
Real estate lender WestImmo has confirmed that discussions are underway to sell the bank.
Posting full year after tax profits of €50.3m for 2013, the German bank said the results were “an important basis for the concrete discussions that are currently being held with several interested parties”.
Last October, Real Estate Capital reported that the bank had received expressions of interest from Aareal Bank, ING Bank and PIMCO.
Since then, Aareal has bought Corealcredit Bank, an acquisition that closed last week. It is thought that c€342m deal may satisfy international lender Aareal’s desire to beef up its presence in its home German market. Corealcredit Bank, which was turned around by Lone Star and has been profitable since 2007, is now a legally independent subsidiary of Aareal.
WestImmo has been dormant since July 2012, although it continues to offer some renewals to its customers as part of its active cover pool management for its pfandbrief covered bond issuance.
It was taken over by Erste Abwicklungsanstalt (EAA), the German government agency set up to wind up the problem assets of WestImmo’s parent, Westdeutsche Landesbank.
The EAA’s desire is to find a ‘strategic’ buyer with a “long-term outlook” for the real estate bank, allowing WestImmo to resume lending, rather than simply selling the remaining loan book.
Claus-Juergen Cohausz, the chairman of WestImmo’s managing board, claimed that the 2013 results showed “the attractiveness of the bank and the very high quality of its loan book”. Net interest income and current income rose from €112.6m to €136.6m and costs and risk provisions fell.
Some €1.2bn of loans were renewed and the balance sheet total fell by a further €5bn, to €13.8bn, due to both a decline in lending and a fall in holdings of securities through pfandbrief redemptions.
A previous attempt to sell WestImmo in 2010 collapsed because the bank had no guaranteed source of funding itself.
Other banks are watching the WestImmo sale closely as it is seen as an indicator of the interest there may be in the sale of larger pbb Deutsche Pfandbriefbank, which under the terms of its bailout, must be sold by the end of next year.
Jane Roberts, editor
Lloyds Banking Group is beefing up its global real estate lending division in anticipation of distributing more senior debt this year.
The bank’s head of global corporate real estate John Feeney has hired Andrea Pittaluga as a relationship director with a remit to focus on private equity and institutional fund manager customers.
Pittaluga will report to head of relationships, Richard Heath.
Feeney said: “Our part of the Lloyds lending business is not as balance sheet-driven (as mid-markets and SME lending) and is very much switching to distribution. Relationships with private equity firms and fund managers, where such as strategy works for them, will be a big part of driving growth. We were looking for people who can spot these opportunities”.
Pittaluga was previously a real estate finance director at Stormharbour Securities, and before that he worked on CMBS deals at Standard & Poor’s.
One area of Stormharbour’s areas of expertise is debt advisory, broking and structuring loans for clients who need bespoke credit advice and origination. Pittaluga worked for Per Mario Floden who heads real estate there.
Lloyds global corporate real estate division is likely to make further appointments in the near future.
Last December, the bank syndicated the majority of a £325m, five-year senior loan against Peel Group’s MediaCityUK, in Salford, after jointly underwriting the debt with Citi at a margin of about 350 basis points.
Jane Roberts, editor
Matthias Schlueter, managing director at Hatfield Philips International, is leaving.
Schlueter had headed Europe’s biggest real estate loan servicer since 2011. Last year the firm and its US parent, LNR Property, were sold to Starwood Property Trust.
In January, Starwood appointed former RBS banker Blair Lewis as chief executive of Hatfield Philips with a mandate to develop the business.
Hatfield is Europe’s dominant third-party property loan servicer with about €18.5bn of CMBS mandates, 100 staff in London and 40 in Germany. According to rating agency Moody’s, the firm had the mandates of 48.5% of all CMBS in special servicing as at the end of last year.
However, with the workout of legacy CMBS transactions peaking now and set to gradually run down, little new issuance, and a large team, Hatfield’s challenge is to expand into new areas such as primary servicing and debt advisory.
Schlueter will leave in the next few weeks after a short handover to other colleagues.
Hatfield Philips said that Wilhelm Hammel, existing director of strategic & business development in Germany, will join the firm’s senior management team, while Matt Carson is promoted to director of operations.
Blair Lewis said: “We regularly assess our organisational and operational structure to ensure we provide superior results for our clients and partners and maintain our role as trusted advisor to Europe’s leading debt issuers and investors”.
During his nine years with the firm, Schlueter had variously overseen underwriting and performance of LNR’s US CMBS portfolio, managed LNR’s European activities which involved investing in debt and latterly headed Hatfield Philips.
It is thought he will stay working in Europe in a role involving real estate debt investing.
Jane Roberts, editor