Investment opportunities focused on deleveraging European real estate will offer strong risk-adjusted returns in the coming years through structured investments and investing in real estate debt, according to LaSalle Investment Management.
The leading global real estate investment manager, which recently launched a special situations fund to take advantage of these opportunities, is working with banks and borrowers to invest in mezzanine and preferred equity positions in order to facilitate real estate recapitalizations, restructuring situations and new acquisitions. LaSalle is also working with banks on situations where it can bring both investment capital and real estate asset management to the partnership.
According to LaSalle, there is an emerging shift in UK/European bank behavior which is leading to signs of increased activity by banks looking to reduce exposure to legacy loans and by borrowers looking to raise mezzanine finance. The real estate asset manager believes there are opportunities to fill the debt gap that exists as real estate is deleveraged as a result of falling values and banks being unable to lend at historic leverage levels. This can be achieved through recapitalizing real estate assets, acquiring debt, or originating mezzanine loans to fund new acquisitions.
In response it has successfully launched its £100 million UK Special Situations Fund, which has already had its first closing, and is targeting investments into a broad spectrum of distressed and structured real estate situations, including mezzanine, preferred equity and debt.
Amy Aznar, Head of Special Situations, LaSalle Investment Management says, "While much of the property boom was built on leverage, real estate fundamentals have come firmly back into focus. Increasingly investors are recognizing that there is a real opportunity for property specialists to fill the debt gap as more borrowers look for new sources of capital."
LaSalle believes that new mezzanine debt investment makes sense in the current environment and that it is crucial to a sustainable market recovery. The investment manager is seeing senior banks quote debt terms at the 50-65% level with spreads of circa 150 - 200 basis points. It says that with the five-year swap rate in the UK below 2.5% and the Euro five-year swap at 2.0%, the cost of senior debt combined with mezzanine finance up to the 70-85% level is accretive to equity resulting in better returns for buyers.
The re-emergence of the real estate fundamentals as key drivers of value is crucial, says LaSalle. It believes that before the recession, a lot of financial engineering, which was fuelled by the oversupply of debt, created substantial over-leveraging within the real estate sector.
Aznar continues, "We are finding good availability of lower leverage debt for prime assets and strong sponsors. However, banks continue to be constrained as a result of the global banking crisis, illiquidity at the banking level, and, in the long-term, more stringent bank regulatory capital rules. We are not seeing abundant financing terms in excess of 65% loan-to-value, particularly on more difficult and larger situations, and therefore as mezzanine providers we are working with a select group of senior lenders to provide combined higher-leverage loan facilities tailored to specific borrower needs.
"Looking ahead, it will be crucial to have deep local real estate knowledge and on the ground asset management expertise, as not all real estate assets will recover at the same speed. We believe that the combination of our structuring expertise and fundamental real estate knowledge provides an advantage in terms of accessing and investing in real estate debt and special situations. We are continuing to raise funds ahead of a second closing on our Special Situations Fund and expect to see many more investment opportunities over the coming months."
Source: Citigate Dewe Rogerson
