Bloomberg News

Funds to Insurers Exploiting Bank Cut in Europe Loans: Mortgages

April 16, 2012

New entrants are joining insurers Axa SA, MetLife Inc. and Allianz SE in seeking to capture the most creditworthy borrowers or securing loans against the best investment properties such as
London skyscrapers. Photographer: Simon Dawson/Bloomberg

New entrants are joining insurers Axa SA, MetLife Inc. and Allianz SE in seeking to capture the most creditworthy borrowers or securing loans against the best investment properties such as London skyscrapers. Photographer: Simon Dawson/Bloomberg

Henderson Global Investors Ltd., La Francaise Asset Management and a Massachusetts Mutual Life Insurance Co. unit are moving into European commercial property lending as the region’s banks reduce 2.4 trillion euros ($3.1 trillion) of real-estate loans they hold by as much as 25 percent.

Insurers, private-equity firms and other non-bank investors will cover between 100 billion euros and 200 billion euros of disappearing bank funding over the next three to five years, according to estimates from Morgan Stanley (MS:US) analysts. That may still leave a shortfall of as much as 500 billion euros, the analysts wrote in a report last month, as banks shrink their balance sheets to satisfy proposed capital regulations.

New entrants are joining insurers Axa SA (CS), MetLife Inc. (MET:US) and Allianz SE (ALV) in seeking to capture the most creditworthy borrowers or securing loans against the best investment properties such as London skyscrapers and Munich shopping malls. Banks are likely to be left with longer-dated debt that hurts their profitability even as they try and withdraw lending after incurring 532 billion euros of losses since the 2007 credit crisis.

“We can cherry pick and do what we want,” said Isabelle Scemama, head of commercial real-estate finance at Paris-based Axa Real Estate Investment Managers, which has 2 billion euros available for lending this year after providing 1.5 billion in 2011. “For the next two or three years, I don’t see any involvement by the banks.”

Price Declines

Lloyds Banking Group Plc, Eurohypo AG and Societe Generale SA are among the lenders cutting property funding as regulators introduce stricter capital rules under an agreement approved by the Basel Committee on Banking Supervision, or Basel III, and as Europe’s sovereign-debt crisis roils funding markets.

Ninety-four percent of property lenders in Europe expect to cut loans “moderately” or “substantially” this year, according to a January survey by PricewaterhouseCoopers LLP, with the rest indicating lending would remain at the same level. Morgan Stanley estimates a lending shortfall will help depress commercial property values that are poised to decline 10 percent by 2016.

Cornerstone Real Estate Advisers LLC, a Hartford, Connecticut-based subsidiary of MassMutual that oversees $32 billion, is looking to provide about 300 million pounds ($476 million) of senior loans in the U.K. this year.

“We’re putting our toe in the water,” said Robert Little, chief investment officer of finance for Cornerstone. “We want to see what the opportunities are and how rapidly we can expand.”

Hiring From Banks

Allianz, Europe’s biggest insurer, plans to lend about 1 billion euros in 2012. In the U.K., insurers such as Aviva Plc, MetLife and Prudential Plc (PRU) all plan to lend at least as much as last year.

AEW Europe, part of Groupe BPCE, is seeking regulatory approval in France to start a senior debt fund with an initial 200 million euros to lend in the second half, said Schalk Visser, the money manager’s head of investor relations.

La Francaise Asset Management hired Bertrand Carrez, a former Natixis SA banker, as head of structured finance last month. The insurance arm of the money manager’s 80 percent shareholder, Credit Mutuel Nord Europe, earmarked as much as 300 million euros earlier this year for property lending and La Francaise plans to have a fund open to other investors operating by the third quarter, Carrez said.

Henderson hired John Feeney March 2 from Bank of America Merrill Lynch as head of a new real-estate debt team. Cordea Savills, the asset management arm of Savills Plc (SVS), also hired Keith Davidson and James Tarry last month from Palatium Investment Management to spearhead its push into real-estate lending.

‘Reshaping’ Capital Markets

“It’s the early stages of a reshaping of the real-estate debt capital markets,” said Natale Giostra, head of CBRE Group Inc. (CBG:US)’s European debt advisory unit.

Banks account for as much as 94 percent of property loans in Europe, made directly or by underwriting sales of covered bonds that remain on their balance sheets as a liability, DTZ Holdings Plc. estimates. That contrasts with the U.S., where insurers provide about 20 percent of commercial real-estate loans and collateralized mortgage-backed securities take a similar share.

As banks reined in senior loans in the past two years, dozens of funds and lenders began offering junior and mezzanine finance, which ranks after senior debt in a default. When the retreat in senior lending turned into a rout, their opportunities also diminished, PwC Real Estate Funds Partner John Forbes said.

“If there’s no senior debt, all the mezzanine funds can offer is a restructuring option,” he said.

London Recovering

The U.K. has seen the biggest growth in lending by insurers among European countries because London was one of the first markets to recover from the property market slump triggered by the credit crisis. Britain has the second-highest level of real- estate debt in Europe after Spain, according to the European Banking Authority.

U.K. bank lending may get scarcer if the Financial Services Authority proceeds with a plan to introduce a stricter classification of loans and increase the amount of capital that banks must set aside against them. The new rules, which would take effect in the second half, may force banks to raise an additional 40 billion pounds to cover losses for bad property loans, according to Andrew Petersen, a London-based partner at law firm K&L Gates LLP.

Insurers with lending teams already in place, such as the U.K.’s Prudential, say the number of approaches from investors looking to put money into lending are picking up.

Client Interest

“We continue to receive a number of inquiries from clients about the attractiveness of this sector and I’m hopeful that in the future we may be investing on behalf of others as well as for the Pru,” said John Barakat, head of real-estate finance at M&G Ltd., a Prudential unit. M&G already makes junior and mezzanine loans for external investors.

Banks have made loans more expensive by requiring borrowers to make larger down payments and pay higher interest rates. Insurers lending in the U.K. charge 20 basis points to 30 basis points less interest than the average, CBRE said. A basis point is 0.01 of a percentage point.

Senior loans, which rank first in line in the event of a default, cost borrowers 200 basis points to 600 basis points more than benchmarks. That appeals to life insurance companies or pension funds, particularly those making annuity payments to investors.

“Real-estate loans match up very nicely with the long-term liabilities we write as an insurer,” said Robert Merck, MetLife’s senior managing director and global head of property investments. “We are off to a very good start this year” after lending about $800 million in the U.K. last year, he said.

Introduce Penalties

Insurers, which tend to hold loans to maturity, have been able to introduce penalties such as claw backs for lost interest income for early repayments.

“Early repayment is a key concern for us,” Scemama said. Such penalties were a harder sell when Axa first started real- estate lending in 2005, she said.

Some non-bank lenders are also prepared to offer longer terms than typical five- to seven-year property loans. Aviva Plc (AV/) provided South African billionaire Nathan Kirsh 145 million pounds on a 20-year term earlier last month to fund about half the cost of his purchase of Tower 42, the first skyscraper built in the City of London financial district.

Long-Term Partnerships

“We don’t want to lend to people who just want the money,” said Kevin Sale, head of the Aviva team that provided about 1 billion pounds of property and infrastructure loans last year. “We’re looking to work in partnership with long-term investors with a horizon of 15 years or more.”

Insurers are choosing to lend against only the best properties, leaving the majority of owners in need of finance for their non-prime properties, CBRE Managing Director of Real Estate Finance Philip Cropper said.

“They are very focused on assets that they would want to buy as an equity investor, so they’re only looking at good- quality institutional-style investment properties,” he said.

To contact the reporter on this story: Simon Packard in London at

To contact the editor responsible for this story: Andrew Blackman at; Rob Urban at

Too Cool for Crisis Management

Companies Mentioned

  • MS
    (Morgan Stanley)
    • $34.32 USD
    • 0.36
    • 1.05%
  • MET
    (MetLife Inc)
    • $50.79 USD
    • 0.38
    • 0.75%
Market data is delayed at least 15 minutes.
blog comments powered by Disqus