UK - A proliferation of institutional debt funds will target different parts of the real estate financing market in the UK, delegates at a Henderson Global Investors event heard this morning.

But the ability of real estate debt funds to operate as long-term sources of real estate finance was also questioned, given their closed-ended, finite-life structures.

John Feeney, head of real estate debt at Henderson, told an audience at the fund manager's London offices that a more diverse range of debt funds, targeting different levels of return, asset quality and leverage would emerge in the UK.

He placed existing debt funds into two camps: "established mezzanine" funds that have targeted 12%-plus returns at a relatively high loan-to-value (LTV) range, and "distressed debt" funds that have sought to buy at a significant discount to net asset value.

A new generation of real estate debt funds would include "core mezzanine" funds, targeting 8-12% returns via higher quality assets at more conservative LTVs compared to their predecessors.

Feeney also predicted the rise of what he termed "core senior" funds, targeting 4-6% returns via high quality assets at low LTVs. A third category, which he coined as "funky senior", would cover funds employing lower leverage than mezzanine funds but engaging with lower quality assets in a bid to generate higher returns than core senior strategies.

Henderson is raising capital for two debt funds and Feeney made it clear they would be targeting the core mezzanine and core senior categories, respectively.

Hans Vrensen, global head of research at DTZ, said he expected to see a drift away from prime assets among alternative lenders in a bid to generate slightly higher returns, citing recent insurer-backed financing deals in alternative sectors such as student accommodation.

Vrensen, whose firm has been predicting - and attempting to quantify - the growing role of non-bank real estate lenders, said alternative lenders should act quickly and "boldly" before the market becomes more competitive.

But Feeney said a key risk for Henderson's lending platform was the ability of assets to be refinanced at maturity, pointing to a lack of "visibility" on some alternative sector assets.

Henderson's senior debt fund will have a seven-year life and will therefore be unable to make loans of greater duration than seven years during an initial two-year investment period.

The question of how debt funds can operate in the real estate lending market when they must adhere to finite lifetime periods was raised by a number of audience members, including William Newsom, UK head of valuation at Savills.

When asked, Andreas Wuermeling, managing director at Deutsche Pfandbriefbank, said borrowers might have concerns about the "sustainability" of lenders subject to finite, closed-ended structures, although he said the UK market was probably best suited to accommodate them.

Feeney stressed that Henderson saw real estate lending as a long-term venture and would raise follow-up funds targeting different parts of the market.

DTZ predicts that Europe will see $75bn in new non-bank lending over the next two years and Vrensen said the speed with whcih this was developing was confounding many people's expectations.

He said these new sources of capital could effectively offset the reduced lending capacity of traditional lenders as a result of new regulatory burdens.
 

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