Jet Stream: Life Companies Land in Europe
Alessia Pirolo Jan. 29, 2015, 2 p.m.
Slowly but steadily the European financing landscape is moving towards a U.S. model of lending, where banks are no longer the dominant lenders.
Life insurance companies are among the lenders that have been active in the U.S. for a long time, but only in the last few years have emerged as important players on the other side of the ocean.
Life companies made up 10 percent of active lenders in Europe, in Cushman & Wakefield’s most updated report on European real estate lending, which uses data on the first half of 2014. Just over two years earlier, in the first quarter of 2012, the entire group of alternative lenders, which also includes private equity and debt funds, totaled 16 percent of active lenders, while most recently, in the third quarter of 2014, they were 40 percent of the total.
Taking advantage of the lending gap left by banks that reduced their liquidity after they were hit by the Eurozone crisis, European insurance giants such as Allianz S.E. and AXA S.A. have been building large loan portfolios across Europe since 2011. Now, U.S. competitors MetLife, Prudential and TIAA-CREF, who already have a foothold in the U.K. market, and are seeing if 2015 might be the right moment to expand to the continent.
“We recently broadened our geographic scope to include Spain and will likely enter some other European markets over the course of the year,” Thor Orndahl, managing director for Prudential Mortgage Capital Company, the commercial mortgage lending business of Prudential Financial, told Mortgage Observer.
“Our primary focus will continue to be office, retail, industrial and residential in the gateway cities and we have more than $1 billion available to lend in Europe in 2015.”
Prudential placed over $500 million in new loans in 2014, across the U.K., Germany and in the Netherlands. Among its recent deals was a $48.6 million mortgage to finance Hines Global REIT’s acquisition of an industrial warehouse in the German region of Bavaria.
Prudential’s push to expand to new markets is part of a larger trend that finds lenders more willing to find business all across Europe.
“Most European lenders continue to focus on the U.K., Germany and France. But, growing equity investor activity in the Netherlands and Spain is driving a greater willingness to lend in these recovering markets,” according to DTZ’s report on European lending trends, released in November 2014. “Italy is also seeing growing interest, again a reflection of the growing investor interest, despite relatively lower levels of growth. With a number of Italian banks struggling in the wake of the recent Asset Quality Review, there are opportunities for overseas lenders in this recovering market.”
Insurance companies have started to explore these new markets.
“In 2014, we have closed our first loan out of our core markets Germany and France, namely in the Netherlands,” said Roland Fuchs, head of European real estate finance at Allianz Real Estate GmbH. “Diversification” is the current buzzword for the company, which is expecting to expand its current 2.5 billion euro portfolio to up to 6 billion euros in the next few years, Mr. Fuchs added. Spain, Italy and the Benelux (Belgium, the Netherlands and Luxembourg) are the main countries where he will look for business in 2015.
Insurance companies are expanding in European markets because their investors expect to find considerable opportunity for superior risk-adjusted returns, said Mr. Fuchs.
And borrowers, for their part, are finding life companies’ offers appealing. “A lot of borrowers find it makes sense to diversify their sources of lending, after they have experienced the 2007 credit crisis,” said Isabelle Scemama, global head of real estate financing at AXA Real Estate Investment Managers, the first European insurance company to set up a business for lending to commercial real estate, in 2005.
Now, many competitors have entered the market and more are expected to come, said Ms. Scemama. AXA, though, has the advantage to be already present in most European markets and to be able to close large deals alone or in syndication. In 2014, it had a participation with Bank of America Merrill Lynch in the 930 million euro loan for Loan Star to buy the Paris office complex Coeur Défense.
Competition among European insurance companies in strong markets such as France and Germany had recently kept U.S. lenders at bay in terms of lending on the continent. MetLife has so far focused mainly on central London properties. TIAA-CREF closed last year approximately $250 million of loans in the U.K.
Now, said Jack Gay, a managing director of global real estate, commercial mortgages at TIAA-CREF, “we are currently looking outside of the U.K.”
Still, renewed fears of a Eurozone crisis linger. With euro area gross domestic product up by only 0.2 percent in the third quarter of 2014 and the euro falling on Jan. 16 to $1.1460—its weakest level since November 2003—the U.K. might remain a safer bet. The U.K. is seen as more reliable than eurozone economies, Mr. Gay said, and in the U.K. “the currency is more stable than the euro.”