Insurers, pension funds and senior debt funds will contribute a combined ?33bn annually in European senior debt within five years? time, reflecting a quarter of all senior commercial real estate mortgage loans, pan-European real estate investment manager AEW Europe forecasts.
AEW?s estimates are based on Europe mirroring the experience in the US during the 1990s.
Mahdi Mokrane, head of research and strategy for AEW Europe, conservatively estimated that there are now per year around ?100bn in European senior debt secured by prime assets with good tenants ? significantly below the ?250bn seen at the peak of the investment market in 2007.
Assuming tepid European economic growth and a correspondingly slow expansion in commercial real estate investment, AEW predicts senior lending will rise to about ?130bn by 2017 ? of which insurers, pension funds, and others could readily absorb 25% or ?33bn.
Mokrane said: ?There is a deep structural change occurring in the European commercial real estate lending market, with insurers and specialised loan funds rushing to fill the gap left by receding bank mortgage lending in the sector.
?I wouldn?t be surprised to see around 25% of all senior loans coming from these sources in the next five years.?
Institutional investors are attracted by the 4% plus net yield achievable on senior real estate loans that are backed by prime core assets with high credit-worthy tenants, which compares to senior corporate bonds yielding 2.4% and 0.8% for a blend of UK, French, German five-year government bonds (i.e. core Europe sovereign debt).
To achieve roughly the same yields as senior real estate loans, investors would need to target European small company lending at a much higher level of risk, said AEW.
Mokrane added that this fast-growing trend in European real estate financing is supported by many income-seeking institutional investors being unwilling to move up the risk curve against the backdrop of political and economic uncertainties in the eurozone that look likely to continue at least until September 2013 and general elections in Germany.
AEW Europe is aiming to build a ?3bn UK and European performing senior loan book by the end of 2015 across a three-pronged strategy of debt fund investments, larger club deals and opportunistic loan book purchasing from deleveraging banks.
At the end of July, the investment manager announced that it had raised ?240m for the senior European loan fund, which is targeting a total investment capacity of ?500m.
Speaking at the EXPO REAL 2012 conference, Christian Delaire, chief executive officer at AEW Europe, told CoStar News that he believes the balance of the capital to raise ? ?260m ? can realistically be raised from external investors over the coming 12 months.
AEW Europe has also launched a strategy to invest in both distressed European direct real estate as well as mezzanine debt.
The private equity distressed vehicle, called the AEW Europe Partners Fund, has a target rate of financing of 60-65% and annualized average total returns of 16% to 18% per annum, net of all fees and expenses.
jwallace@costar.co.uk
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