DEBT FINANCE BRIEFING: UBS on track to meet target for UK debt fund

UBS Global Asset Management is on track to raise $500 mln (€445 mln) for its first real estate debt fund in the UK, Anthony Shayle, MD and head of global real estate and UK Debt, has told PropertyEU’s debt finance investment briefing.

UBS raised just under €200 mln last year at the launch of its first whole senior loan platform in the UK - Participating Real Estate Mortgage Fund (PREMF) I - from three investors including Japan’s Mitsubishi Corporation and an unnamed European pension fund. ‘We do not sell down the debt and we are now heading for $500 mln. We’re roughly at the halfway stage.’

Speaking at the company’s Frankfurt headquarters on Tuesday, Shayle said the type of loans the fund had issued were ‘very varied’. UBS tends to focus on the market for loans under £30 mln (€40 mln), he added: ‘There’s a very distinct polarisation between the smaller end of the market and the rest. The cliff edge is £30 mln equivalent or above. For loans that fall below that figure, the number of lenders falls off quite significantly.’

A key success factor is that UBS comes to real estate lending from a direct perspective, Shayle said. ‘Underwriting is crucial to everything we do. It’s in our DNA and we have a very good track record so far. This is our first fund, but I think there will be a follow-on fund; this is a good base for one for continental Europe. We plan to launch a similar fund there in due course.’

According to Shayle, alternative lenders face even more stringent monitoring than traditional banks. In a bank, the treasury is where failed loans may cause an upset, but the treasury function is divorced from the origination function and ultimately banks are accountable primarily to regulators, he noted. 'if we lose a loan, we are immediately called in front of our investors. We are accountable to our investors quarter by quarter.'

He cautioned, however, that lending margins are narrowing. ‘We’re seeing serious compression, which essentially is following the trend in the capital markets. Lending into a market that is growing is good fun, but you do need to be cautious at this point of the cycle.’

UBS-PREMF provides senior loans with a loan-to-value of up to 80% and a maturity of between five and seven years, offering investors a net return of between 8 and 10%. In the US, UBS has some $35 bn tied up in real estate lending, Shayle noted. ‘We are now following our US counterparts.’

Earlier Shayle told PropertyEU in an interview that UBS-PREMF II would have a more traditional approach, offering loans with a conservative loan-to-value. The fund, which is likely to at least match its predecessor in terms of size, is expected to be launched early next year, he added.

‘The timing is yet to be determined but could be imagined as having capital to lend by the time the investment period in PREMF I has concluded and that could indicatively mean around June 2016,’ Shayle said.

While the UK and Europe are still far away from the more balanced real estate lending landscape prevalent in the US where just under half of all lending is provided by alternative sources, change is under way on this side of the Atlantic, Shayle said. ‘There is a trend towards diversification of the sources of debt. We have said for some time that we need it and now it is starting to emerge.’

He added, however, that the US model was far more firmly entrenched. ‘The banking sector accounts for about 55% in the US and that has been the trend for the past 50 years, not just the last two or three. We are making good progress in Europe but this illustrates where we need to get to.’