Pension fund debt could 'damage' real estate market
GLOBAL – The entry of pension funds and insurers into the real estate debt market could result in fewer transactions because loans – and properties – will be locked away for longer, according to a paper from law firm Berwin Leighton Paisner.
Based on 19 interviews with investors including Aviva Investors, Metlife and Macquarie, the paper claimed the shift away from banks towards longer-term lenders could result in less flexibility, with owners holding onto properties for longer.
It also suggested the shift away from bank lending could limit the market to big-ticket investments – above £100m (€124m) – resulting in "oversupply at the top end and a shortage at the lower end".
Yet as non-bank new entrants refine their focus on specific parts of the market, at least some latecomers are market and segment-specific banks with no pre-crisis baggage.
Moreover, the paper's authors claimed many banks, written off by newer participants, remain committed to the real estate market, especially as it comes to terms with pricing high enough to generate a worthwhile margin.
"Banks now see real estate finance as part of the bigger package they offer to clients," said the paper.
"Deals for banks are being driven by relationships rather than the desire to just close the deal, as may have been the case previously."
Meanwhile, investors are looking for asset-backed structures they can easily take apart.
"There is a general desire to see simply structured loans backed by bricks and mortar," said the paper.
"The benefit of simplified structures is that they allow everyone involved in the transaction to understand how the deal structure is formulated. Transactions can be assembled more easily and therefore taken apart more easily."
Identifying the move away from unnecessary complexity as a key feature of post-Lehman debt deals, its authors nonetheless questioned whether real estate finance had become less complicated.
"Bespoke financing for bespoke client on bespoke property is the way forward," they said.