During 2018, Real Estate Capital explored the most important trends in the European commercial real estate financing space through interviews with some of the market’s key players. Among them, we spoke to the people in charge of real estate lending at Goldman Sachs, AustralianSuper, Legal & General, Royal Bank of Scotland, GreenOak Real Estate, Barings Real Estate and Amundi. Here are abridged versions of our interviews.

Jim Garman and Richard Spencer, Goldman Sachs Merchant Banking Division

Goldman Sachs’ merchant bank closed its largest global real estate credit fund, raising $6.7bn in January. The bank’s Jim Garman and Richard Spencer explained their strategy to us in an interview published in March.

Jim Garman (r) and Richard Spencer of Goldman Sachs MBD

Pre-2008, the Real Estate Group in Goldman Sachs’ Merchant Banking Division, also known as Real Estate Principal Area (REPIA), raised third-party capital for a series of equity investment funds. Since then, equity investment has been done through in-house capital and joint venture arrangements. The third-party fund money it now raises is channelled into lending to property, rather than buying it.

To secure the optimal debt deals, it has an advantage – the sheer size of its latest real estate credit vehicle. Broad Street Real Estate Capital Partners III (RECP III), which closed in January, has been scaled up to $6.7 billion, including leverage – around $2.7 billion bigger than its predecessor fund, closed in 2014, and more than double its maiden debt fund, launched 10 years ago.

The strategy is global, with European activity run from London by co-head of the merchant bank division’s Real Estate Group, Jim Garman, and managing director Richard Spencer.

“We like the risk profile of the investment opportunity and investor demand was strong,” says Garman. “Plus our firm wanted to increase its exposure to the strategy.”

For the vehicle, REPIA has raised $2.5 billion from third-party investors, with an additional $1.7 billion of the bank’s balance sheet capital committed to the fund. In addition, $2.5 billion of leverage matched the third-party capital in the form of term financing.

“There’s a competitive advantage in being able to originate and hold very large loans,” Spencer says. “The more capital we have, the more we’re able to do that.”

The Broad Street credit fund series, through which REPIA invests in senior loans against transitional properties or developments and subordinated debt against stabilised assets, has a track record in writing large loans, including some of the European market’s biggest recent mezzanine financings. The largest deals in RECP II hit the $300 million mark. On average, the loan size from the strategy across all funds in Europe is $134 million.

Although the European lending market remains competitive, the size of Goldman’s credit vehicle allows REPIA to pick the spots where it sees interesting deals and lower levels of competition, translating into higher margins. “Whether it’s a senior loan or a mezzanine loan, we’ll target a return of somewhere between 8 percent and 10 percent. Looking at the whole portfolio level, that has historically meant an average blended return of 9 percent,” says Garman. “Meanwhile, returns have become tighter for lenders with origination capacity for more straightforward loans.”

Since 2008, when the Broad Street series was launched, 9 percent returns have been consistently achieved. “We are lending to the most sophisticated financial sponsors in the world,” adds Spencer. “They don’t borrow money at 9 percent lightly – we have to offer them a service, and that’s either the ability to lend in scale or to deal with a particularly complex situation.

“If we can deploy one of those competitive advantages – particularly size – we find that competition is thinner. We can do tickets of $300 million or $400 million. The number of people who can do that is extremely limited.”

RECP III generates gross returns of 16 percent, providing a net 13 percent to investors. To achieve this, the $2.5 billion of third-party equity was matched by fund finance, borrowed at a rate of around 3 percent.

“Other funds use leverage, but take individual loan level leverage on a repo basis. That creates maturity mismatches and mark-to-market risk. I think the term nature of our fund’s financing is fairly unique,” Spencer says.

Being part of Goldman Sachs, with a merchant banking division managing $85 billion of assets, of which around 17 percent represents real estate, has helped REPIA to raise its latest wave of capital. Third-party equity in RECP III is $700 million higher than in the previous fund, which raised $1.8 billion of limited partner capital by its final close in May 2014.

The $2.5 billion raised in the new fund comprises around 60 percent institutional investors and 40 percent high-net-worth individuals and family offices, from across Europe, the US, Asia-Pacific and the Middle East. Investors include the Korean pension fund Construction Workers Mutual Aid Association, which has committed $35 million to the fund, according to Real Estate Capital data.

In addition to this fundraising, the New York-headquartered merchant bank has committed $1.7 billion of balance sheet capital to the vehicle – its largest-ever investment in a real estate fund. In the last fund, Goldman represented 15 percent of every investment, now increased to 25 percent.

The attractive risk profile of real estate credit led Goldman to increase its exposure to RECP III, Garman says. At the same time, investor demand was strong, Spencer adds, meaning the vehicle could have been bigger still. “I think investors like that we put our money where our mouth is,” he argues. “From our perspective, it’s a bit different. We like the investment returns and the economics of this strategy come from earning a return on how the dollar is invested, rather than fees.”

“Right now, in Europe, we’ve seen the opportunity in big mezzanine tickets, either a single asset or portfolio acquisitions, where we’re able to invest $100 million-plus of mezzanine debt in an individual transaction,” Spencer says. “In the senior financing market in Europe we definitely see more opportunity now than we used to, including more development opportunities.”

Allocations to Europe, mainly in the UK, Ireland, Finland and Germany, have been increasing across REPIA’s credit fund series. The first fund in the series invested only in the US, while, in RECP II, Europe accounted for 20 percent of the fund’s investments. Over the past 12 to 18 months, European allocation is close to 40 percent, which is the target for RECP III.

“The reason Europe has become more relevant in this strategy is the way the European real estate markets are evolving post-crisis. We are getting to a point where we have seen that a lot of assets were pulled out of distressed situations, getting then repositioned and now moving to a point where they are more stabilised and properly capitalised,” Garman says.

 

Nick Ward, AustralianSuper

In September, Australian pension giant AustralianSuper entered the European real estate debt market for the first time. Nick Ward, from the firm’s Mid-Risk division, explained why.

Nick Ward, AustralianSuper

AustralianSuper’s assets under management stand at around A$145 billion (€90 billion), making it the largest superannuation fund in the country. As part of its drive to invest its huge reserves of capital, AustralianSuper became, in September, the latest high-profile entrant into a market far from home – Europe’s commercial real estate debt space.

Its debut deal was the development financing of a mixed-use project in London; the 370,500-square-foot One Crown Place, a complex including offices, shops, luxury flats and a hotel, being developed by Malaysian company MTD Group. AustralianSuper provided £230 million (€262 million) of construction debt, with real estate investment manager TH Real Estate providing an additional £50 million.

The deal, an announcement made clear, represented the first piece of business from a longer-term property debt mandate, through which AustralianSuper has appointed TH Real Estate in an advisory capacity. In its sights, the joint announcement revealed, are financing opportunities in London and other major European cities, with a focus on mezzanine and development or refurbishment opportunities. In an indication of scale, the firms said deals would be above £100 million.

It is an ambitious target for a new entrant into Europe’s property debt space, so what is motivating AustralianSuper’s desire to lend against bricks and mortar on the other side of the world?

For AustralianSuper, real estate debt falls under what the firm calls its ‘Mid-Risk’ division, alongside infrastructure, property and credit. The division was recently created to bring together its unlisted assets. Nick Ward, who has been with the organisation for seven years, handles real assets debt investments, including infrastructure and property, in the Mid-Risk division.

“Given some of the prices being paid for property assets are fairly full at the moment on a relative basis, we have a preference to invest through debt,” he tells Real Estate Capital on the phone from Melbourne.

The pension fund is a relatively young investor on the global real estate scene. Around five years ago, it pushed into real estate equity investment, creating a direct property portfolio internationally. Including fund investments, it now has more than the equivalent of €6.1 billion in the property equity portfolio, accounting for around 7 percent of the overall fund.

“Real estate assets have generally performed strongly since the global financial crisis, largely because of low global interest rates,” Ward explains, “but this interest rate cycle will end soon, taking away the tailwind driving capital values. So, the equity return is becoming more challenging to source. Through debt, you can achieve similar returns to equity, for a lower risk profile.”

It is a rationale increasingly familiar among investors, but why seek property debt investments in such far-flung climes? The answer, Ward says, is that the relatively small size of Australia’s property market makes investment on the desired scale difficult. “An advantage we have as the largest pension fund in Australia is our large balance sheet, which means we can go for the higher-profile deals. We’re definitely driven off-shore because of the size of the assets we want – there are not so many large opportunities [in Australia] as in North America or Europe.”

The One Crown Place deal, a senior secured position, with upfront fees and drawn margins, provides similar returns to a mezzanine position, at the tighter end of the 400bps to 600bps range targeted. Development finance, due to banks’ limited scope to satisfy the market, is a target, Ward explains.

“As a general observation, there is less in the UK and European market on the mezzanine side; there is probably more in the US. Having done One Crown Place, it’s possible to see most of the opportunities in the near term in the UK will come in the development space.”

Pressed about the firm’s ambitions, however, Ward says: “We’re definitely looking to establish a portfolio of loans in Europe. We talk internally, expecting the fund to roughly double every five to six years, so when we do something it needs to be on a scale that is relevant at the broader fund level.”

“I’d like to be targeting the real assets debt portfolio of A$5 billion to A$6 billion over the next five to six years, so A$2 billion to A$3 billion loans in Europe, equating to £1 billion to £2 billion would be realistic.”

 

Lorna Brown: Legal & General Investment Management

LGIM hired Lorna Brown from Blackstone to grow its real estate lending business. We found out about her plans in April.

LGIM’s Lorna Brown

In the hunt for yield, Europe’s insurers are increasing their exposure to commercial real estate debt. UK institutional stalwart Legal & General is among them. In January, the London-based company hired Blackstone and Royal Bank of Scotland alumna Lorna Brown to lead the debt side of its real estate operation as it attempts to grow its presence in the market.

Legal & General Investment Management entered the property lending space in 2012. Figures relating to its origination activity are hard to come by, although the firm’s website refers to a real estate debt portfolio of around £2.2 billion (€2.5 billion) as at 30 June 2017.

Among UK property debt market participants, there is a perception that LGIM’s lending activity has been on a more modest scale than some of its insurance market competitors, with the emphasis weighted towards equity investment.

“Bringing in Lorna Brown, allowing her to grow her team, is a statement of intent,” suggests one London-based real estate debt advisor, speaking privately. “They are a large group, so they should be able to compete with their peers.”

“When the team was set up in 2012, there was a desire, shared by many insurers, to access property debt as an investment class. The next stage now that I have arrived is to increase the profile and penetration into the market,” says Brown, discussing her new role. “We aspire, at the right price and risk point, to continue to grow further.”

There are no set lending targets, Brown insists, but asked about the scale of LGIM’s ambitions, she points to the fact LGIM Real Assets’ managed assets total around £27 billion today, of which real estate debt accounts for not more than a 10th. “We think there’s an opportunity to increase the relative balance with further real estate debt investments,” she says.

LGIM’s property lending unit will not dramatically reinvent itself, Brown insists. Rather than rethink the product range, it will stick to its senior lending roots, taking a more “creative and flexible” approach to underwriting and lending.

Insurance companies are often perceived to be lenders of low-risk senior debt, lent on decades-long tenors to a narrow range of property types. Brown suggests that LGIM’s lending to date has not subscribed to that model and the firm is a more flexible lender than some in the market might assume.

“We’ve written shorter-dated loans outside the mainstream property classes,” says Brown. “We can be competitive in terms of price, the type of debt and the speed at which we can make decisions.”

“We look to underwrite senior risk, but we are able to look at short and long duration loans on a range of properties including operational assets,” Brown explains. “We can back assets subject to active business plans; it’s what people might expect of an alternative lender. We are happy to be a primary originator, to be in club deals or to purchase positions. This allows exposure to the primary and secondary markets.”

As a lender of insurance money, the current focus is on fixed-rate lending. From there, LGIM can underwrite a range of scenarios, with a focus on income. “We need to see an existing or future income stream,” Brown explains.

She adds that managing long-term insurance liabilities provides insurers with the continued opportunity to finance those looking to lock-in finance for longer terms than banks offer. “In Europe, people are questioning whether interest rates will rise, and that creates an opportunity.

“Investors who are looking for strong cash income return or family offices seeking wealth preservation may think about refinancing now and securing a longer-term facility that allows them to take advantage of current interest rates and loan margins.”

Real estate debt is a natural asset class for insurers, she adds: “Insurers are keen to find fixed-income products to match their liabilities and seek a range of investment durations. The return premium relative to public bonds makes real estate debt an attractive asset class for investors.”

 

Phil Hooper, Royal Bank of Scotland

Phil Hooper took over as the new head of real estate finance at RBS in January, with the challenge of navigating the UK bank’s property business through the late stage of the cycle. Our interview with Hooper, in full here, was published in May.

Phil Hooper, RBS

When it was announced last December that Paul Coates was to swap his role as head of Royal Bank of Scotland’s real estate finance business to lead CBRE’s European debt and structured finance unit, the bank looked within its own ranks for his replacement.

The continued reinvention of RBS as a property lender now lies with Phil Hooper, who took the mantle as head of real estate finance for RBS and subsidiary NatWest in January. Hooper has spent his entire career within what is today the RBS group, joining NatWest in 1986, which was bought by RBS in 2000. “I’ve been with the group for more than 30 years and in real estate for the last 14 years, so I know the organisation well,” Hooper says.

“I love real estate, it’s a phenomenal asset class,” he remarks. “It’s great to be involved in a sector where you help to create homes and places for people to work.”

As well as giving him insight into the workings of the organisation, Hooper’s longevity at RBS means he witnessed the most turbulent period in its history. The tale of RBS’s hubris and subsequent fall from grace is well-documented; the rapid global expansion under former CEO Fred Goodwin; the ill-fated 2007 acquisition of Dutch bank ABN Amro; the aggressive selling of financial products at the height of the economic boom and the subsequent UK taxpayer bailout in 2008.

Commercial real estate played a significant role in RBS’s expansion and subsequent troubles. At its height, RBS clocked up global commercial real estate exposure of around £100 billion (€113.5 billion).

“We got the business to the right size and the right shape. The risk appetite and terms around lending dramatically changed. The business is much more resilient,” Coates says.

Meeting Hooper in the bank’s 250 Bishopsgate offices in the City of London, it is noticeable that the huge lobby is adorned in the purple branding of NatWest, in line with a rebranding strategy announced in 2016. In England and Wales, lending will be done through the NatWest brand, he explains, with the RBS badge retained in the bank’s homeland of Scotland and the Ulster Bank brand used in Ireland.

The repositioning is symptomatic of a wider change of culture in the organisation. “You do learn a lot when you go through a difficult period and it’s important to remember why banks, including us, found themselves in a more challenging place,” Hooper says.

Business is heavily weighted towards senior lending, although an element of the book – 2 percent – is reserved for non-senior lending, which Hooper explains is for customer developments with the right management team, track record and scheme.

Asked how things have changed and will continue under his watch, Hooper is unequivocal. “The way we lend money is different now. The way the industry lends; the governance provides a framework for how we lend into the market. We aren’t going to move back to structures and platforms which we once had, because they didn’t survive when the market reduced. We are aware of what went wrong.”

Talk turns to the impact of regulators on UK clearers, which have been subject to ‘slotting’ since 2013. “We work closely with the regulators. Historically, their intervention has probably restricted higher-leveraged, riskier lending, which has helped support a more stable recovery as well as playing a significant role in how capital is deployed into CRE markets. More recently, we haven’t seen the regulators having an impact on our origination appetite.”

In an increasingly competitive lending environment, he adds, staying in control of lending practices is crucial. “The value of how we operate will be determined when things become more challenging. It’s important at that point for us to remain consistent and provide capital into the sector.”

Last year, RBS provided more than £6 billion of real estate lending. The objective, Hooper explains, is to maintain overall liquidity in the market, likely to require such volumes on an annual basis to counter loan repayments.

“There is no intention to reduce the book to a certain size and we’re under no pressure to do that. We’re comfortable with the size of the business,” he explains. “The strategic ambition is to maintain our position in the market.”

 

Jim Blakemore, GreenOak Real Estate

Banker-turned-debt fund manager Jim Blakemore is taking GreenOak Real Estate’s lending business into Continental Europe. We caught up with him in January, fresh from raising €600 million for the strategy. Find the full interview here.

Jim Blakemore, GreenOak Real Estate

Jim Blakemore, the former real estate banker running the strategy, admits his personal transformation to private debt fund manager was not in the playbook. Initially a real estate lawyer in New York, he was seconded to investment bank Lehman Brothers and became an employee in 1997, beginning a 15-year tenure at the now-defunct Wall Street bank.

After making the move to London in 2000, he became European head of the bank’s Global Real Estate Group in 2004, overseeing a team of more than 100, writing loans and structuring CMBS deals. The bank’s 2008 collapse, he admits, “came as a shock” and prompted a four-year work-out stint with what remained of the firm. It also prompted a career rethink.

“I thought I’d end my career at Lehman,” recalls Blakemore. “I had one job before Lehman and I’ve never chased the next job. I liked it there, I had room to grow, and maybe I’m a risk-averse person,” he laughs.

Like other ex-real estate bankers, the private debt world beckoned. After considering raising his own fund, he received an offer in 2012 to join the privately owned GreenOak, which was founded two years earlier by former Morgan Stanley Real Estate alumni John Carrafiell, Sonny Kalsi and Fred Schmidt.

The core of GreenOak’s credit unit is formed from Blakemore’s Lehman team and includes former bankers Chris Taylor and Manja Stueck. Although some of the people are the same, the nature of the lending is very different. “What I really like about what we’re doing now is the slower pace of the market,” he says. “We’ve closed loans in 10 days, but I’ve never felt the pressure to close deals.”

The continental European strategy significantly expands GreenOak’s lending scope. The debt team’s initial focus was a work-out mandate bought from Lehman, before it hit the fundraising trail to raise fresh capital for lending in the UK.

“We were new to being a fund manager, so we wanted to be very focused and the UK was further along in its recovery than Europe,” says Blakemore.

Now is the time to target the continent, Blakemore says: “There’s growth in Europe, creating more space for value lending. Investors in the Netherlands, for example, are seeing GDP increase dramatically and no development for a long time, so buying a vacant office, putting money into it and finding a tenant seems like a viable business plan. That wasn’t the case three years ago. We think there’s more scope for lending to business plans in continental Europe than in the UK, as investors are uncertain on where the UK is headed due to Brexit.”

“Europe’s exciting, because the real estate market trend had been distress for several years and now we are seeing genuine growth,” he says. “What’s a little tricky, from a lender perspective, is that some of these properties were 50 percent below market value a year ago but values have risen, so that’s something to be cautious about.”

While Spain has featured on GreenOak’s agenda from an equity point of view, lending is more likely to be focused on northern Europe, including Germany, France, the Netherlands and the Nordics. Local entrepreneurs as well as international private equity firms are the typical clients.

“The challenge from a credit point of view is whether things get too exciting in Europe,” suggests Blakemore. “Some bad assets might sell for more than they’re worth. Euphoria attracts capital and later players might not be as sophisticated as the early people in the market. If the equity is overpaying, that’s a problem.”

 

Chris Bates, Sam Mellor and Charles Weeks, Barings Real Estate

As Barings Real Estate planned the expansion of its European lending activities, including a drive to raise capital from outside its parent company’s resources, we met the team to discuss the market in an interview published in November.

Barings’ Chris Bates (l) and Sam Mellor

In the decade since the global financial crisis, insurance companies have emerged as an important source of debt capital for owners of European commercial real estate.

US life insurance firm Massachusetts Mutual Life Insurance Company, better known as MassMutual, is among them. In 2013, its property-focused subsidiary – known before 2016 as Cornerstone Real Estate Advisers and since then as Barings Real Estate – hired former Royal Bank of Scotland banker Chris Bates to lead lending activities from the firm’s London office, with its parent insurer as its single client.

As Barings targets expansion of its debt business this side of the Atlantic, it is aiming to widen its capital base, for the first time inviting external investors into its European real estate debt strategy, as is the case with its US debt business and across its equity activities.

In October, the firm hired Sam Mellor, formerly a real estate debt specialist at the London-based hedge fund Chenavari Investment Managers, to spearhead a lending drive into Continental Europe, as well as increasing the emphasis on providing ‘structured’ debt products outside the traditional senior loans usually associated with insurance firms like Barings’ parent.

Real Estate Capital caught up with Bates and Mellor, as well as Barings Real Estate’s head of Europe, Charles Weeks, at the firm’s London headquarters to discuss the merits of inviting external investors into real estate lending strategies.

Weeks, who has overall responsibility for the property business – debt and equity – across Europe, explains that, while the company has tested the waters of the UK debt market over the past five years, it sees the growth of the investor base as the natural evolution. “In the US, we have a large commercial real estate loan book; 10 times the size of our European commercial mortgage portfolio. There is also a rapidly growing US book of structured loans. There is a desire from senior management to build out debt operations similarly in Europe. As with the equity property business, the clear direction of travel is about raising third-party capital to grow.”

Barings is in the early stage of the strategy. Initially, capital partners which the firm has invested with in equity deals in Europe or the US, or perhaps debt deals in the US, could be invited to participate in individual European loan deals, with a view to establishing lending mandates for institutional partners lacking their own origination infrastructure in Europe.

“Investors will be parties without their own lending infrastructure,” adds Mellor, “but which have invested in real estate with us in the past. We have a construction finance and a mixed-use financing opportunity, both in the UK, which could be the first deals done alongside external investors.”

While the team are keen to frame the planned growth of the business within Barings’ natural growth plans, they also acknowledge what Bates describes as the pull factor of growing global investor demand for commercial real estate debt. So, what is driving that demand?

Bates argues it comes down to a greater acceptance among institutional investors of the product as a defined asset class. “We see appetite from fixed income investors as well as real estate allocations, as it has become an investment class of its own.

There is also particular demand for European lending strategies, as there is a feeling among investors that Europe is not as far through its cycle as North America. Another reason for demand is that private real estate debt provides diversification for investors.”

“Some investors have not crossed the Rubicon into private real estate debt yet,” Bates continues, “but many now have separate accounts here and in the US.”

Just as the profile of investors in real estate debt has expanded, so has demand for diverse lending strategies, as investors with differing risk appetites enter the sector. In their hunt for yield, for instance, many Asian investors are looking for the returns generated through high-yielding lending, while those investors viewing property debt as an alternative to fixed income remain satisfied with senior loan strategies, which tend to deliver returns in the region of 2 to 3 percent across the market.

Mellor, who has a background in complex loan deals from his hedge fund days, agrees investor demand is far from uniform: “Certain investors want core mortgages, while others are targeting the higher-yielding product. There is limited demand in Europe for highly leveraged loans, but many investors require mid to high single-digit returns and some downside protection.”

Institutional investors, Bates points out, consider real estate debt one of many alternative asset classes, meaning the merits of the asset class are pitched against a vast array of investment opportunities. “Within the real estate market, we often just consider ourselves in isolation, but investors are searching for relative value across their entire investment landscape – corporate debt, equities, gilts, infrastructure, direct real estate, etc. Many clients have live pricing across all asset classes, meaning real estate debt is benchmarked against many alternatives.”

 

Pedro Antonio Arias, Bertrand Carrez and Thierry Vallière, Amundi

Asset management giant Amundi made the move into the debt space in 2018. We spoke to the firm’s debt specialists in an interview published in June.

Bertrand Carrez, Pedro Antonio Arias, Thierry Vallière (l-r)

With the launch of its debut real estate debt strategy, French heavyweight Amundi has joined a European property debt fundraising drive that shows no sign of abating.

The firm, which manages €1.4 trillion of assets in total, is aiming to raise up to €500 million for a commingled fund. In addition, Amundi has also secured a segregated lending mandate from Crédit Agricole Assurances, the insurance arm of one of its parent banks, which provides it with an additional €300 million. Across the strategy, it will deploy capital through senior lending in eurozone countries.

A traditional real estate equity player moving into debt is becoming a familiar story in the market. The growing interest in private real estate debt as an asset class has prompted the launch of a series of vehicles with varying risk profiles, including BNP Paribas Asset Management’s €1 billion eurozone-focused senior debt fund and Schroders’ whole loan strategy, through which it is aiming to deploy £200 million (€228 million) across the UK.

With fundraising activity in full swing, Amundi has entered a competitive market. The firm is aiming to capitalise on its strong track record in managing fixed income to attract institutional investors seeking steady yields while minimising risk.

“To legitimise our credentials, we need to remain within the field clients are expecting us to be,” explains Pedro Antonio Arias, head of Amundi’s real and alternative assets division. “Our traditional clients don’t look for high risk; they are typically investing in fixed income. We are now offering them the less risky part of the real estate capital structure, which is debt.”

Bertrand Carrez, head of the firm’s real estate debt strategy, adds: “This is a mixed product; obviously real estate-flavoured, but also within the fixed-income sphere, which allows our investors to diversify from their bond exposure.”

Amundi’s property debt strategy is targeting net returns of 200-250 basis points, which Carrez notes compares favourably with BBB bonds issued by REITS which typically generate 60bps. “As long as spreads in the bond market and interest rates are where they are, we will offer a yield premium which is attractive to investors,” he says.

Thierry Vallière, the firm’s global head of private debt, explains the decision to target returns at the lower end of the risk spectrum reflects that the firm is raising capital from investors “seeking regular income, limited volatility and capital preservation”.

At the same time, due to the current low-yield fixed-income environment, investors want to secure a relatively “attractive” premium for the risk profile linked to the traditional liquid debt capital market, Vallière adds.

Delivering that premium, however, is a challenge in a market in which most debt providers are providing vanilla senior finance and avoiding edgier schemes, generating a situation where financing mandates for core assets in prime locations are subject to strong competition, with subsequent margin compression. In France, for instance, margins in Q1 2018 for 60 percent loan-to-value senior lending inched in to 1.05 percent, from 1.10 percent in the previous quarter, according to data from CBRE.

“It’s true that there’s too much capital and returns are compressing, but the premium we can deliver on what you can find in traditional capital markets is relatively stable. It remains at a premium of 100bps to 150bps, which is attractive,” Vallière notes.

“A large portion of the banking market is targeting very core transactions today – the best properties in the best locations. For these assets, you can expect low margins in the area of 80bps to 100bps, but these are not the assets we are targeting for our debt strategy,” he explains.

Amundi’s fund will focus on core-plus assets, with some scope to lend to value-add properties, to provide returns in the range of 200bps. “The strategy also allows us to lend in alternative jurisdictions within the eurozone, like Southern Europe, where you might get a better return. Our flexible approach also includes the alternative segments; hotels, logistics or healthcare assets,” Carrez says.

Amundi has grown rapidly as a manager of real estate assets. Four years ago, it managed €8 billion; it now manages €27 billion.

“It was a natural step to move into real estate debt. We have very strong expertise in buying real estate assets, so we know how to analyse a building, we have this expertise,” Vallière notes. “We can mix this expertise with our fixed income and credit know-how.”