MAGAZINE: Investors turn to real estate debt as ‘defensive play’

As the property cycle rolls on, the number of investors warming to private real estate debt investing as a defensive move is on the increase.

The late point in the cycle is becoming an additional reason to target the asset class, says Amundi Real Assets which closed on €150 mln of capital in February for its first real estate senior debt fund. The French asset manager hopes to raise up to €500 mln by the end of the year to deploy in Western European loans arranged by banks.

Bertrand Carrez (pictured), Amundi’s head of real estate debt, says it is an interesting change which the company is seeing in its discussions with investors. ‘A few of our prospects are more willing to consider this strategy than they were, because they arbitrage real estate debt against real estate direct assets,’ he says. ‘As more and more investors believe we are in the advanced stage of the property cycle they consider it could be pertinent and defensive to invest in real estate debt. They are of course buying the illiquidity and complexity premium but they are buying security too.’

Underwriting model
Like other investment managers such as AXA which expanded into the asset class after the global financial crisis, Carrez stresses the experienced in-house coverage at Amundi: ‘Our underwriting model, which on-boards our real estate expertise and our private debt expertise when we make our selections, is very safe and has a lot of value for these investors,’ he claims.

Four of the five investors coming in at first close are from France and one is an Italian insurance company. The firm is in discussion with 5-10 other investors, mainly tier 1 and 2 insurers and pension funds from France, and a Belgian insurance company. The biggest have generally already invested in this asset class, Carrez says: ‘Either they are interested in benchmarking their existing commitments and partners by making new ones or they are buying our specific underwriting model because it is different from the one they have already tested. And we have newcomers too, generally tier 2 investors in terms of size.’

There is also interest from Asia although not yet for the co-mingled fund. Amundi has had discussions with a big Japanese institutional investor linked to a separate mandate to be awarded after a competitive process in a few months’ time.

The new fund is taking participations in loans yielding margins of circa 200-250 basis points which it finds by avoiding very vanilla assets at low leverage. ‘We have already secured, from different bank partners, €120 mln of investments across four deals. They span hotel, office and mixed-use and two are in France, one is in Italy and the mixed-use property is in the Netherlands.’

Credit Agricole mandate
Before the fund launch, Carrez began investing on behalf of another client, a €550 mln segregated mandate from ‘family’ company Credit Agricole Assurances. This mandate targets lower risk senior debt than the fund, at margins of 150 basis points over Euribor. French bank Credit Agricole is one of Amundi Asset Management’s founders and shareholders. The bank also has a formal partnership with Amundi’s real estate debt business covering both the mandate and the fund, giving them priority if they like the deal when the bank has liquidity.

Carrez’s team has invested two-thirds of the segregated mandate capital in six transactions in France, Spain and Italy. He declines to comment on the largest, a circa €100 mln tranche in a French hotel financing, but Credit Agricole CIB led a €300 mln financing for Henderson Park’s €550 mln acquisition of the Westin Paris-Vendome hotel last October.

The volatility in bond pricing in Q4 2018 may start to affect the cost of real estate borrowing. In Carrez’s view: ‘Private debt spreads haven’t moved yet, it will take more time than it does in the public market. But we are in discussion on two or three potential deals in France, where the spread might be a bit higher than we could have expected three months ago, and with flexibility negotiated by the arranging bank with the borrower to guarantee a safe distribution.

‘Market flex clauses had disappeared, and since December they have started coming back in France and in the UK too. So spreads could go up a bit in the coming weeks and months. I’m not saying we see it in all deals but it’s a trend which is interesting.’


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