EXCLUSIVE: Pricoa outlines European real estate loan strategy

Drew Abernethy, head of European originations at Pricoa Mortgage Capital in London, speaks to PropertyEU about the company's plans in the European real estate lending sector.

Pricoa Mortgage Capital Company, Pramerica Investment Management’s London-based mortgage arm, is looking to underwrite €600 mln in European real estate loans this year, at a time when it has just brought third party investors into the mix, Abernethy old PropertyEU.

‘We want to underwrite around €600 mln in loans this year in the UK, Germany and Holland. We think there are enough opportunities in these markets not to need to go into new jurisdictions,’ Abernethy said.

AMERICAN FRIEND
The news comes hot on the heels of the announcement last week that US insurer and pensions provider Friends Life had awarded a £500 mln investment mandate to Pramerica Investment Management - an asset management arm of US-based Prudential Financial, Inc. - to invest in commercial real estate loans in the UK.

The mandate relates to the investment in commercial real estate loans in Friends Life’s annuity funds. All of the assets will be UK-based, senior secured, fixed-rate loans with maturities ranging from five to 15 years. The loans will be originated by Pricoa Mortgage Capital. Friends Life annuity funds do not currently have a material exposure to commercial property rental flows, so this mandate facilitates a diversified risk exposure away from corporate bonds for particular credit ratings.

Interestingly, Pricoa Mortgage Capital didn’t initially set out to attract third-party investors, Abernethy said: ‘We were introduced to Friends Life and their appetite was very similar to ours, so it was a ‘win-win’,’ he said.

EUROPEAN PLANS
In London, Pricoa Mortgage Capital is open to investing in all institutional-grade properties, although it is more selective in the regions. ‘We feel that large deals offer a competitive advantage and with Friends Life we can improve on that. We could do deals of up to £300 mln (€348 mln) in London, for example, or up to £100 mln in regional cities. We haven’t done any club deals in Europe yet, although we have often partnered with other insurers in the US. But we’d certainly be happy to club with other lenders,’ Abernethy added.

Pricoa Mortgage Capital entered the European lending space last year, making its first loan in the UK in June last year and its first loan in continental Europe last March. It provided €55.5 mln of a €70.5 mln financing package in the Netherlands.

‘Of our €600 mln target, we have already done around $150 mln (€116 mln) in loans. We’re very flexible and don’t have a set allocation per country,’ Abernethy said.

INSURERS IN THE UK
Pricoa Mortgage Capital and US insurer Pacific Life are also believed to be jointly providing £280 mln of financing for Brazilian banker Moise Safra’s trophy London asset, Plantation Place. The loan will be to refinance Plantation Place’s CMBS and junior debt, which matures later this month. Pricoa Mortgage Capital declined to comment.

There has been a strong influx of insurers entering the debt space over the past two years, driven by strong returns and stable cash flows, spurred on by more traditional lenders becoming more risk-averse, thereby creating a ‘debt gap’ that alternative investors are keen to plug.

‘Insurers are making significant inroads and taking an growing slice of the UK commercial mortgage market, now almost 10% of total drawn funds. They are looking to place longer term money at fixed rates, the driver being to match assets and liabilities with a higher return on their money against comparable risk in the bond markets,’ said Richard Porter, national director of corporate finance at JLL in London.

On senior lending, investors are typically looking for an annual return that’s around 250 bps above an equivalent seven-year UK gilt, currently at roughly 2%, according to Porter. ‘That’s a decent return when you look at the alternatives, given the risk profile of senior lending. Whilst there is an increase in funds available, the current supply of lending opportunities is not keeping up with demand, which means that some funds are struggling to find appropriate places for their capital,’ he added.

In the first quarter of this year, there were 38 senior and mezzanine debt funds in the pipeline of raising capital, according to senior analyst at C&W in London, Mike King. Based on the minimum target fund size, this suggests that the funds are looking to raise €24.6 bn. This is up from 15 funds in the same period last year, according to King. However, the likelihood of all these funds reaching a close is unlikely, given stiff competition between funds. According to Preqin, $8.7bn (€6.6 bn) of capital was raised by 34 European real estate funds in 2012. Nonetheless, this is down considerably from a peak of $33.5bn (€25.6 bn) in 2007, when 127 such funds raised capital.