Allianz Real Estate is expanding its commercial lending programme on both sides of the Atlantic. Helmut Mühlhofer and James Stolpestad explain
In stark contrast to the US and the UK, insurance companies and pension funds have hardly been active in commercial real estate lending on the European continent until recently. One important motive for entering the property lending business is the low interest rate environment and the high exposure to banks and European government debt in the fixed income area.
Allianz Real Estate has been active in commercial real estate lending for more than 30 years, having been providing mortgage loans in the US over that period. In this market, Allianz Real Estate today manages a loan portfolio in excess of $6bn (€4.7bn) on behalf of Allianz Life of America and Fireman's Fund.
Late last year, Allianz Real Estate was mandated to originate and manage commercial real estate loans in Germany on behalf of several German Allianz entities. The first noteworthy transaction was the €300m loan for the acquisition of the Deutsche Bank head office in Frankfurt by a new closed-ended fund raised by DWS Investment.
One important benchmark in Germany is the German Pfandbrief, which currently only yields around 3% (10-year term). Moreover, the volume of covered bonds has been declining continually for years, thereby increasing the demand for alternative fixed income investments within the insurance and pension fund industry. In the current environment, conservatively structured property loans with a 7 to 10-year term can generate 4-5% per annum, which provides an attractive yield pick-up compared with mortgage bonds or German government debt.
One big advantage for insurance companies vis-à-vis the traditional commercial property lenders is refinancing, or the fact that insurance companies and pension funds do not have to access the markets to raise funds for their lending activities. Lending is an additional fixed income investment alternative, which needs to create ‘relative value' as compared to the aforementioned bond benchmarks.
Very similar to our direct property investment activities, we are looking to finance core and core-plus, well-established, stable office, retail and logistics assets where we would typically look at loan-to-values (LTV) of 50-70%. In contrast to the current banking market, we are looking for long-term (7-10 years) fixed-rate loans. The targeted transaction size would be €100m-200m, which we would also hold on our books in its entirety, since we have several Allianz internal investors to serve.
It is important to note that our lending activities are driven by our investors' requirements. This is the reason why we started in Germany (although a highly competitive market) and this is the reason why we might look across the German borders towards the Dutch and French market. Besides Germany, France is the most important market in terms of property owned by Allianz Group companies, and the drivers of change in the fixed income area of our French investors are the same as for the German investors - diversification of the fixed income investment book, yield pick-up.
As a consequence of the current turmoil in the European banking landscape, in combination with the low-yield environment, there might be a bigger move on the part of insurance companies and pension funds into property lending. There might also be a segmentation of the market, comparable to the scenario in the US and UK where banks focus on short-term (up to five years) and insurers on longer-term transactions.
The US commercial mortgage loan portfolio includes loans on over 400 properties, including office buildings, retail centres, multi-family apartments, industrial warehouses and medical office buildings. These assets are located in more than 30 metro regions throughout the US, although new investments are concentrated in the top-20 US markets. Allianz provides long-term loans (typically 7-plus years) at 50-75% LTV ratios.Interest rates are competitive to other insurance company lenders, typically 170-220 basis points over comparable term Treasuries. The company originated $1bn of new loans in 2011. In 2012 it will add a short-term loan programme to offer 3 to 7-year loans on similar terms.
US loans originated in 2011 include office and multi-family apartment buildings in Washington, DC, retail and apartments in Los Angeles, retail in Dallas and industrial warehouses in a number of markets including, among others, Indianapolis and Salt Lake City. The company overweighted new originations in multi-family apartments due to strong rental growth trends and very low levels of new construction. Apart from that it also made significant equity investments in the multi-family sector.
With the US real estate market facing approximately $17trn of maturing loans over the next few years, Allianz expects favourable demand for loans. And it expects improving credit quality as the real estate market fundamentals continue to improve.
The rationale for the lending programmes on both continents are similar. First, commercial mortgage loans provide higher yields than many fixed income alternatives, such as corporate bonds. The risk profile is favourable, given the conservative underwriting standards, low LTV ratios and strong coverage levels.
Second, the level of competition is increasingly favourable.
There is strong demand for real estate loans. In the US, the competition from commercial mortgage-backed securities issuers is down significantly. In Europe, traditional bank lenders are on the sidelines. Allianz expects these conditions to continue for several years. Over that time, the company expects to develop a very solid lending programme.
Helmut Mühlhofer (left) is head of debt and capital markets at Allianz Real Estate. James Stolpestad is CEO at Allianz Real Estate of America