DEBT FINANCE BRIEFING: Alternative lenders thrive in diversified market

Europe’s real estate financing landscape is becoming more diversified as alternative lenders increase their share of the market, PropertyEU’s debt finance investment briefing in Frankfurt heard on Tuesday.

‘There's an improved optimism,’ Paul Dittmann, head of commercial senior mortgages at M&G Investments, told delegates gathered at the German headquarters of UBS in Frankfurt’s Opernturm tower. ‘Banks are also coming back,’ he added. ´We’re seeing more syndication and club deals than in the past three to five years.’

The drive to alternative real estate lenders is particularly evident in the UK, where banks accounted for 72% of lending prior to the global financial crisis, Dittmann pointed out. Since then the proportion has halved to 36%. ‘Alternative lenders are now taking 25% of the market. They are really coming into play,’ he said.

Alternative lenders have also increased their presence in recent years in Ireland and Spain, where traditional bank lenders were hit particularly hard by the crisis and subsequently cut back their lending. The same is not true for Germany, Dittmann added: 'Germany has a strong Pfandbriefmarket and that has kept out alternative lenders.'

Dittmann noted that the recovery of the European financing market has coincided with a strong uplift in transaction activity. ‘A record amount of capital is coming back to Europe,’ he told the audience during his introductory presentation.

In the first quarter of this year, transactions grew by 40% compared to the same period in Q1 2014, with growth especially strong in periphery markets. Total volume this year is set to surpass 2007 levels which would lead to new all-time records, Dittman added: ‘Just three years ago, nobody wanted to invest in Europe, but now we’re seeing strong inflows from non-Europeans in particular. The main buyers are Asians, Middle Easterns and Americans.’

In the first quarter alone, M&G saw inflows of €4 bn from north American clients, Dittmann said. ‘We’re seeing more activity from funds, institutions and sovereign wealth funds. Europe is becoming more of an institutionalised market.’ He added, however, that the outlook for some regions still remained uncertain. ‘Underwriting is critical,’ he said.

M&G Investments is, according to Dittmann, the largest investor in private real estate debt in the world outside the US. The London-based company started investing in real estate debt in earnest in 2010 and now has €4.2 bn tied up in senior real estate loans on behalf of internal clients from parent company and UK-based insurer Prudential. It also operates a dedicated senior mortgage fund in the UK and has segregated mandates valued at between £200-500 mln on behalf of insurers in Europe.

Interest in debt finance is growing, but it takes time, Dittmann said. In the beginning pension funds were attracted by the 'uber' profits, but as these erode, they need to be educated that real estate debt can match their benchmark yields of 4% as a long-term and safe investment.

'For the last three to five years, we have been educating pension funds and insurers that this is real alternative investment strategy, It's an education process. A lot of investors have diversified and now consultants are raising funds and debt for us. We are building an investor base but we're still at the beginning.'