German life insurer to build up ‘multi-million’ credit portfolio

German life insurer VPV is aiming to build up a multi-million-euro credit portfolio within the next three years, as smaller insurers leap on the credit portfolio bandwagon.

Earlier last week, VPV entered the real estate loan space, providing €80 mln of refinancing for the Linden Center in Berlin in partnership with an unnamed insurer. The loan, which has been provided jointly by the two insurers, runs for 15 years and will be released in several tranches up until the end of 2015. The 25,000 m2 shopping centre is majority owned by ECE’s European Prime Shopping Centre Fund.

Law firm Hogan Lovells advised both lenders but declined to comment.

VPV is now aiming to build up a credit portfolio worth ‘several hundred million euros’ over the next three years, according to Björn Kunde, a director of corporate finance at Deloitte & Touche in Frankfurt who is advising VPV on its portfolio.

‘VPV would like to build up a multi-million euro debt portfolio, focusing on long-term (up to 15-year loan terms) senior debt in Germany within the next three years,’ said Kunde. ‘VPV made the decision to build up a debt portfolio because they think insurers will become a permanent supplement to banks in the debt space. It’s a long-term strategic decision. VPV is looking to underwrite loans on office, retail and residential properties. However, it is not interested in operator-managed assets such as hotels or healthcare.’

In addition to targeting prime locations in Germany, VPV will also consider Austria in ‘exceptional’ cases. Loans will typically range from €10 mln to €60 mln, with a maximum LTV ratio of 70%. For loans lasting from 5 to 15 years, interest is expected to be set at 3.00% or above.

According to Jörg Schürmann, managing director of corporate finance at Jones Lang LaSalle in Frankfurt, insurers are particularly good at stepping in to underwrite loans that conventional banks may be less willing to consider: ‘It’s harder to get a 15-year loan like this from banks - that’s why insurers like these loans. It’s no longer just about the ability to underwrite large loans - that’s not a key differentiator anymore. We’ll see more and more insurers looking at underwriting loans like this,’ he said.

VPV is the latest in a line of insurers to diversify into the debt space. In recent years, a number of European insurers have entered the fray, including German insurer Allianz, which has since built up a European commercial real estate loan book of €1.3 bn, with plans to grow this further. Such insurers are offering loan terms that compete favorably with those given by banks, Schürmann said. ‘Typically, banks would probably charge around 2.2% interest on a 5-year loan for a prime property - but it would be more than that for a 15-year loan.’

And as smaller insurers dip their toes into the lending space, the alternative financing market is moving into a new phase, according to Marcus Lemli, head of Germany at Savills: ‘First, we had the big insurers such as Allianz and now we have smaller insurers entering the fray. It makes sense for smaller insurers to club together to underwrite small-ticket loans. The driver is the availability of capital and the attractive risk-return ratios. The market is reorganizing itself and insurers prefer long-term loans which are a better match for their own liabilities,’ he said.

In January, Allianz provided €145 mln of refinancing for the Königsbau Passagen shopping centre in Stuttgart in partnership with mezzanine provider DRC Capital to Evans Randall. Allianz underwrote a seven-year loan with an interest rate of 3.5%. In addition, European Real Estate Debt II, advised by DRC Capital, provided a mezzanine facility of €37.5 mln. The 26,000 m2 shopping centre is the biggest in Stuttgart.

‘We would never have seen deals like this a year ago. It’s a reflection of how liquid the German lending market is and of how strong interest is,’ Schürmann said.

Such has been the interest in debt funds on the part of non-bank lenders that alternative lenders are now expected to offer around €130 bn of new lending capacity across Europe by the end of 2015, according to DTZ. The new lending capacity is expected to come from nearly 70 different funds and insurance companies, including AEW UK, UK insurer Aviva’s Aviva Core Senior Fund, US financial group ARES Capital and US insurer Pacific Mutual. Non-bank lenders’ share of the market is projected to grow to 15% in the UK and 7% in Europe over the next three years. However, both remain well below the North American average of 23%.

And there are plenty of refinancing opportunities to whet investor appetites: ‘It’s estimated that there are around €370 bn of real estate loans outstanding in Germany, many of which need to be refinanced, and that provides opportunities for insurers,’ Schürmann added.