M&G Investments, the international investment arm of Prudential Plc, is mulling a new junior debt fund for Europe, John Barakat, head of real estate finance at M&G Investments, has told PropertyEU.
‘Our current thinking is to return to market with a single junior fund, although we have not yet put a definitive cap on size. We are sensitive to market conditions but I suspect it will not be dissimilar to our last junior fund,’ Barakat said.
That would put the new fund at around £750 mln (€947 mln), given that M&G raised £1.35 bn from over 40 European and US institutional investors for two junior commercial mortgage funds in March 2014. The larger fund, M&G Real Estate Debt Fund III, had a final closing of £750 mln, targeting the ‘stretch senior’ portion of the mortgage capital structure.
‘We started our debt business after the financial crisis,’ Barakat said. ‘I joined M&G the week after Lehman Brothers! For us, it’s about finding relative value and dislocation in the market. We want to push into areas ahead of the curve.’
M&G Investments underwrote £2.2 bn in new loans in Europe last year, setting a new record for the firm, following around £1.8 bn in 2014. One of its largest loans last year was a five-year refinancing deal in August of £140 mln to the Cosgrove Group for the Liberty Shopping Centre in Essex.
Holding the loan to maturity
Unlike many lenders, M&G’s USP is that it seeks to originate on a whole loan basis and then hold the loan to maturity. ‘We raise investment to target different risk points in the spectrum. We’ve underwritten loans from 18 months to 25 years but most of them have been for five-to-seven years. However, we have raised capital that wants to invest longer term and we think there will be more appetite from insurers for longer-term loans going forward. We can deploy capital at any point of the capital structure,’ Barakat said.
Typically, senior debt tends to comprise around 55% to 60% of a loan, with junior debt accounting for another 20% to 30%, according to Barakat. ‘We tend to prefer bigger ticket loans – our largest loan last year was for £250 mln.’
M&G has not released details of the loan, although it told PropertyEU it was for the PRS in London. The investment manager typically underwrites senior loans of between £75 mln and £100 mln. Junior loans can be anything from £20 mln to above £100 mln, Barakat said.
Finding value
According to Barakat, M&G doesn’t have a target loan volume this year ‘because we’re more concerned with finding value’. While he declined to break down the group’s loan portfolio by asset class, he said that the firm has underwritten loans for offices, retail and hotels as well as industrial and leisure properties. ‘We look at most asset classes but we haven’t lent to the healthcare sector thus far,’ he added.
M&G’s core investment market is Western Europe, including the UK, Germany, France and the Netherlands, although it has also been active in Ireland and the Benelux region.
However, it is important for investors to understand that real estate lending is pro-cyclical, according to Barakat: ‘As real estate values increase, there is a tendency to lend more. So when thinking about lending 65% against today’s values, you need to consider what that LTV would have been against 2014 values and make a judgement about where the market is in the cycle. That’s why we like to have a "bottom up" analytical approach to lending. An LTV is not a sufficient single metric to define risk.’
M&G launched its first real estate debt fund in 2009. It has since raised more than £4.5 bn for senior commercial mortgages as well as additional mandates. The group had £246.1 bn of AUM globally, including real estate, equities and fixed income, as of end-December 2015.
