Eight years can be a lifetime in any investment industry, but in the upstart world of real estate alternative lending, which seems to have developed at lightning speed, it probably equates to three lifetimes.
In 2010, when LaSalle started investing in real estate debt, the real estate industry was still reeling from the shock of the global financial crisis, and capital of any kind was exceptionally rare. In those days, being an ‘alternative lender’ was about plugging gaps throughout the capital structure and being opportunistic with the accompanying returns. As stability returned to the market, banks cautiously returned to lending albeit amid deleveraging targets and a strict regulatory framework. Although many different alternative lending strategies developed, a large part of the market focused on offering junior or mezzanine loans in partnership with senior lenders.
Now things are changing again. In this new developing market phase, the largest platforms, such as LaSalle, are developing a wider range of lending solutions from one-stop-shop whole-loan solutions to development lending, while still offering cost-competitive mezzanine loans. These changes are a function of developments in the wider lending market and also changing investor attitudes towards the asset class.
The UK real estate lending market has been at the forefront of the changing environment in Europe. According to the Bank of England, lending to property as a proportion of bank balance sheets has declined from a peak of almost 12% in 2008 to below 7% today, with net lending roughly flat over the last three years. The introduction of slotting in 2013 solidified a bank lending environment where high LTVs or lending against riskier assets such as developments imposes significant capital requirements. The result is not only less lending overall, but a significantly greater participation of alternative lenders.
According to the Cass Commercial Real Estate Lending Survey, from almost a standing start, ‘non-bank’ lenders (excluding insurance companies) make up roughly 11% of the market, and made 15% of new origination in H1 2018. In the wider European market, Cushman & Wakefield estimates the same market share figure is around 6.7% but there is reason to believe that bigger changes are afoot across the continent.
The so-called ‘Basel IV’ proposals published in December 2017 set out a regulatory framework regarding real estate with similarities to the slotting mechanism used in the UK, which include higher risk weightings for higher LTV lending.
LaSalle’s recent lending experience reflects the story of growing demand for alternative lending in Europe. Over the past 18 months, LaSalle has arranged nearly €350m (£306m) across Spain, France, Germany and the Benelux region, representing around 50% of our lending activity during that time.
As market space has opened up for alternative lenders, investor appetite for the product has equally matured and broadened. Longstanding LaSalle clients, including pension funds and insurance investors, increasingly recognise that real estate lending can balance their equity portfolios through the cycle, while providing attractive current yield.
The lending strategies that are emerging are starting to resemble those of the real estate private equity world: senior and whole-loan strategies representing core/core-plus lending strategies; while whole loans on transitional assets and mezzanine lending corresponding to value-add lending risk/return. Preferred equity and special situations debt/equity hybrid strategies stretch into the value-add/ opportunistic lending space.
In recent months LaSalle has developed whole-loan lending strategies, lending between €25m and €100m-plus with loan-to-value ranging from 65% to around 80%. Initially, the programme will be over-weighted to the major euro-denominated western European markets and Scandinavia, where the focus will be asset quality and cashflow predictability.
Furthermore, our £804m LaSalle Real Estate Debt Strategies III (LREDS III) fund can offer whole loans priced to blend senior and mezzanine margins, without necessarily requiring subsequent tranching and syndication.
LREDS III has recently agreed a circa £100m whole loan against a newly completed, operational asset in London. Alongside these new strategies, LREDS III continues to invest in select mezzanine opportunities such as a £58m, five-year mezzanine facility to finance the acquisition of 59 UK urban logistics assets by Blackstone and a €27m mezzanine loan for an office building in La Défense, Paris.
Complementing both strategies is LaSalle’s longstanding LaSalle Residential Finance Fund (LRF), an £850m development lending programme focused on student housing, residential, hotels and healthcare, which recently agreed a circa £58.5m senior debt facility to support the construction of The Lexington, a build-to-rent residential scheme in Liverpool. Consistent with LaSalle’s continued expansion into European markets, the LRF programme recently broadened its focus to continental Europe, recognising the growing student housing development opportunity.
Across all LaSalle’s lending strategies, the themes of increasing geographic breadth and appetite for simpler, more flexible lending solutions are consistent. Since those uncharted days in 2010, our platform has originated 59 transactions investing around £2.5bn. LaSalle’s ability to innovate and scale our debt solutions should enable us to remain at the forefront of an ever-evolving real estate debt landscape.
- Invests solely in real estate, bringing a unique focus and depth of expertise to the sector
- LaSalle operates in 17 countries and 24 offices worldwide
- As an independent subsidiary of Jones Lang LaSalle Incorporated (NYSE: JLL), one of the world’s largest real estate companies, we have a presence in every region of the world in which we invest
- Each investment team functions as an entrepreneurial group, managing a bespoke investment strategy for each client and fund. Teams are responsible for an investment’s entire lifecycle and are directly accountable for performance
- Regional investment committees comprising LaSalle’s most senior talent oversee all accounts and funds. This proven approach builds trust and alignment with clients’ investment objectives
PW Perspectives Supplement Winter 2018
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Demand for alternative lending is rising in Europe