The case for a UK Mortgage REIT regime

Transcription

1 MREITs in Europe Moderator: Hans Vrensen, Global Head of Research, DTZ Panellists: Ion Fletcher, Senior Finance Policy Office, British Property Federation Marion Cane, Executive Director Tax, Ernst & Young Simon Hampton, Head of European Real Estate Investment Banking, Jefferies International Limited The case for a UK Mortgage REIT regime UK CRE lending: Why action is needed Why include Mortgage REITs in the toolkit How would Mortgage REITs operate? Evidence of investor appetite? US mortgage REITs: Lessons to be learned HM Treasury: Key concerns they shared with us 1

2 Why action is needed: Ownership of the UK CRE Loan Book bn Loan Book Percentage of Overall Market Loan Book Total Loan Num ber of Range Book Organisations < 1bn yy 1-5bn bn bn bn bn bn 5 10bn 1 5bn < 1bn Source: DMU, Ernst & Young The largest 11 organisations hold 76% of the UK CRE loan book. This has broadly been the case since Nine organisations have featured in the top 12 every year since The aggregate UK CRE loan book declined from 228bn in 2010 to 212bn in 2011 with 153bn of this debt scheduled to mature between 2012 and For H1 2012, 48% of new lending was from 4 organisations and at 15.4bn, new lending volume was down by 2.1bn on H Total CRE loan book reduced to 204bn by mid year By security, the CRE loan book is broken down: 81.5% investment 4% commercial development 7% residential development for sale 2% owner occupied 5.5% other Why action is needed: Declining lending volumes to the UK CRE sector Annual origination volumes are highly volatile The market is reliant on 6-12 institutions % Year-on-year % change in gross annual lending Source: DMU The normal real estate cycle has been accentuated by the decline in lending capacity of the banks. Since 1999, between 5 and 7 of the 12 most active lenders have been UK lenders and building societies (German lenders between 2 and 5) and the health of these major institutions is inextricably linked to the sector. The reduction in lending volumes is now impacting the recovery of the sector and the economy it supports, and the volatility in lending supply of lending is harmful. 2

3 Why action is needed: A polarised lending market CRE lending activity is increasingly focused on London and the South East. During 2010, 80% of UK CRE lenders recorded a typical loan size of 9.9m and below but this fell to 63% in Geographic focus of lending In their 2011 UK commercial property lending report, DMU comment: it would appear that the decline in the value of lending secured by properties in London and the South East that has broadly been recorded since 2001, has levelled off during 2009 and 2010 and, by year-end 2011 the proportional allocation had started to increase again. Loan book allocations to London, in particular, have increased from 26% at year-end 2010 to 29.5% at year-end Anecdotal evidence contained in the comments suggests that this is a deliberate policy of many organisations that now wish to concentrate their commercial property lending, if possible, in London and the South East. Lot size % Typical loan size achieved in UK market < 10m 10m 19.9m 20m 29.9m 30m 49.9m 50m+ Source: DMU, Ernst & Young Why include Mortgage REITs in the toolkit? A more diverse market would reduce the CRE sectors reliance on a handful of organisations too large to fail and constrained by regulation. Mortgage REITs would provide a platform to access equity capital from long term, income orientated investors (pension funds, insurers, ISA investors, family offices and overseas equivalents) seeking secure, bond-like returns in an on-shore, liquid investment vehicle with a strong global brand and subject to appropriate market disclosure and controls. Their focus would be on new origination, would contribute to bank deleveraging and shift the concentration of risk from banks/government towards the private sector. Adopting conservative gearing policies will limit their lenders exposures to falling asset values (e.g. 50% gearing of loan asset with 50% LTV). With stabilised UK CRE lending volumes of c. 210bn, Mortgage REITs could potentially deliver 10bn - 25bn* of lending capacity over time. *assumes banks 50%, CMBS 20%, insurers 10-15% and mezzanine lenders 7-10% 3

4 How might Mortgage REITs operate? Closed ended, listed vehicle Shareholders Origination/co-investment equity investment 90% distributions? Managed Loan book maturities Access to matched funding Conservative matched debt structure Debt providers origination fee Mortgage REIT PLC independent board Regulated vehicle origination of secured lending interest and loan repayments Tax exempt status t Distributions subject to withholding Own or third party origination platform CRE borrowers Evidence of investor appetite (1) Debt Funds Market information shows debt funds with target fund raisings of 3.5bn ( 2.1bn) and focused on UK/European CRE lending have raised capital in excess of 1bn ( 0.5bn) to date. 11 further managers are known to be active, for example Blackstone is planning a $4bn global fund with one-third likely l to be deployed d in Europe. Manager Fund Target markets Structure Targeted returns Capital raised Capital raising target AEW Europe AEW Europe CE Lux SIF 5-6% 240m 500m Europe Senior European Loan Fund Cheyne Capital Management Cheyne Real Estate Credit Holdings UK, Germany Cayman Islands domiciled 12%+ 220m 500m Cheyne Capital Management Cheyne European Real Estate Bond Fund UK, Germany Irish UCITS 4-6% 100m 300m Colony Capital Colony Real Estate Debt - Senior Fund Eurozone, UK Lux SCA SIF 2.5-6% NA 500m AXA Real Estate CRE Senior 2 UK, France, Germany, Nordics, Netherlands Lux vehicle Euribor + 250bps 500m 750m Henderson Global Investors Henderson High Income Real Estate Debt Fund UK, Germany CE Lux FCP 10% NA NA Henderson Global Investors Henderson Senior Secured Real Estate Debt Fund UK, Germany CE Lux FCP/SICAV Swaps bps NA 500m ICG-Longbow ICG-Longbow UK Real Estate Debt Investments III UK Lux SARL 11%+ 213m 500m ICG-Longbow ICG-Longbow Senior Secured UK Debt Investments UK Listed investment company 6%+ 105m 100m+ La Banque Postale Asset Management Real Estate Debt Fund UK, France, Germany, Benelux Lux vehicle Euribor + 250bps NA 500m M&G Investments M&G Real Estate Debt Fund II & III UK, Germany CE commingles fund NA NA NA M&G Investments M&G Senior Commercial Mortgage Loan Fund UK, Germany CE fund NA NA NA Pramerica Real Estate Investments Pramerica Real Estate Capital IV UK, Germany English Limited Partnership 12-15% NA 500m Renshaw Bay Renshaw Bay Real Estate Finance Fund Europe CE fund NA NA 500m Starwood Capital Group Starwood European Real Estate Finance Range Guernsey entity 9-10% 228m 500m Other active managers UBS Global Asset Management DRC Capital LaSalle Investment Management Blackstone Real Estate Debt Strategies Blackrock Cornerstone Real Estate Advisers Europa Capital Schroder Property Cordea Savills Aviva Investors First Property Group Source: IPE Real Estate, EY 4

5 Evidence of investor appetite (2) Highlighted below are examples of similar income-orientated, listed investment vehicles which have attracted interest from institutional investors who would underpin the success of the UK mortgage REIT model. Market Cap Dividend Yield (%) Total Assets Asset as at John Laing Infrastructure Fund , UK Listed Infrastructure Funds ( low risk, income orientated listed products) International Public Partnerships , HICL Infrastructure 1, , Bilfinger Berger GCP Infrastructure Investments i infrastructure 1, , ,343 9,277 US Commercial Mortgage REITs Source: SnL Financial, LSE, EY Total Assets 2012 / Market Capitalisation ( M) Company Name IPO Date Focus Last Reported ( 000) Starwood Property Trust Inc. 11/08/2009 Mortgage Loans and MBS; Mortgage Loans, MBS, and Debt Investments 2,662,084 2,515.2 Newcastle Investment Corp. 10/10/2002 Real Estate 2,428,734 1,726.7 NorthStar Realty Finance Corp. 25/10/2004 Office, Retail and Industrial 3,394,282 1,221.4 Colony Financial Inc. 23/09/2009 Mortgage Loans, CMBS, REO, and Other CRE Investments 883, istar Financial Inc. 16/03/1998 Commercial Mortgage; Senior and Mezzanine Real Estate Debt 3,786, Resource Capital Corp. 06/02/2006 Commercial Mortgage; Mezzanine Real Estate 1,525, Apollo Commercial Real Estate 23/09/2009 Mortgage Loans, MBS, and Debt Investments 485, RAIT Financial Trust 08/01/1998 Commercial Mortgage; Fixed Rate Mortgage, ARM; Mezzanine 1,800, Arbor Realty Trust Inc. 07/04/2004 Bridge & Mezzanine Loans; Commercial Mortgage; Multi-family 1,047, Gramercy Capital Corp. 27/07/2004 Commercial real estate finance, Commercial Mortgage, Multi-family 1,335, Ares Commercial Real Estate 25/04/2012 Real Estate Finance 4, BRT Realty Trust 12/01/1988 Commercial Mortgage, Multi-family 238, American Church Mortgage Co. 01/11/1996 Commercial Mortgage - Church Loans 26, Realty Finance Corp. 27/09/2006 Commercial Real Estate; Mezzanine 3, JER Investors Trust Inc. 13/07/2005 Commercial Mortgage 694, = post financial crises listing 20,316,553 8,793.9 US mortgage REITs: lessons to be learned Source: Wells Fargo Although US Commercial Mortgage REITs have a chequered history, the general trend has been toward the adoption of more prudent lending criteria, lower leverage and greater transparency, with a shift toward more detailed financial disclosure. Typically they operate in a different quadrant of the CRE market to other major market participants. 5

6 HM Treasury: Key concerns they shared with us Concern Do current economic conditions favour their introduction? Will they deliver significant new lending? Would there be cast-iron differentiation from pre-recession securitisation vehicles? Would Mortgage REITs rely on short term debt and maturity mismatch? How would they be regulated, would it be less than for banks? What specific conditions would be imposed by a Mortgage REIT regime? What mechanisms would be in place to ensure alignment of interests with banks? Is tax transparency essential? What would be the impact on the Exchequer? 6