Investors in commercial mortgage bonds have grown so tired of waiting for Europe’s market to recover after the financial crisis that they are now lending directly to property developers.
Cheyne Capital Management (UK) LLP and Insight Investment Management Ltd. are among investors making loans. Firms started by former JPMorgan Chase & Co. banker Bill Winters and hedge fund manager Alistair Lumsden are raising money to lend, according to two people familiar with the matter.
Europe’s 2007 real estate crash triggered a wave of defaults that crippled the region’s commercial mortgage-backed securities market. Annual CMBS sales have averaged about 3.7 billion euros ($5.1 billion) since 2009, down from 39.9 billion euros in 2007. At the same time, banks recovering from the financial crisis and adapting to new capital rules have pulled back from property lending. Money managers, seeing an opportunity to profit, are moving into the lending void.
“Banks are shrinking their lending businesses and the CMBS market is not functioning,” said Graham Emmett, a London-based partner at Cheyne, which oversees $6.5 billion of assets. “There is an opportunity for non-bank lenders to step in and buy distressed loans or make new loans.”
Outstanding European CMBS totaled 100 billion euros in the fourth quarter, down 33 percent from 2009.
Renshaw Bay, the asset manager started by Winters in 2011, raised more than 150 million pounds ($253.2 million) this year for its real estate fund that makes loans, according to a person familiar with the matter.
AgFe LLP, the London-based advisory firm founded by Paul Rolles, a former head of Morgan Stanley’s financial asset-backed securities team, is starting a second fund to provide senior-ranking loans, according to a person with knowledge of the company’s plans.
A spokesman for Renshaw Bay, who asked not to be named, citing company policy, declined to comment on the company’s plans. Rolles declined to comment on AgFe’s fund.
Lumsden, who stepped down as chief investment officer of CQS U.K. LLP’s $2.3 billion asset-backed securities fund in December 2012, is seeking to raise $250 million for East Lodge Capital Partners LLP, according to a person familiar with the matter.
The company will start trading this month and focus on direct lending and structured finance, said the person, who asked not to be identified because the plans are private. Georgiana Brunner, a spokeswoman for East Lodge Capital employed by Greenbrook Communications, declined to comment.
Commercial real estate prices in the U.K. plunged 44 percent from June 2007 to July 2009, according to researcher Investment Property Databank Ltd. Many CMBS deals were struck at the peak of the real estate market in 2007, and the drop in prices left thousands of properties in Europe worth less than the loans made to purchase them.
Managers of CMBS have waited for property prices to rebound so they could avoid losses, rather than working out the defaults immediately. Since U.K. prices hit bottom in 2009, they have recovered only 20 percent, according to the research firm.
CMBS managers who restructure troubled deals by selling debt and foreclosing on properties hold a record 18 billion euros of commercial real estate loans in Europe, according to Moody’s Investors Service. The ratings company estimates that losses on CMBS loans made before the credit crisis will total about 9 billion euros over the next five years.
Europe has been slower in dealing with distressed securities than the U.S., where a prompt clean-up after the credit freeze boosted confidence in the market. The U.S. CMBS market returned to growth last year with $80 billion of issuance, according to JPMorgan data. That compares with $12 billion in Europe in 2013, down from $54 billion in 2007, the data show.
“The CMBS market is a shadow of what it was,” said Shaheer Guirguis, London-based head of secured finance at Insight Investment, which manages about 270 billion pounds. “We don’t see sustained new issuance and in the secondary market volumes are very thin, meaning you can’t put a lot of money to work or express yourself in a sizable way.”
As the CMBS market languishes, European banks have retreated from real estate lending. Since 2012, they have disposed of 4.3 trillion euros of assets, from Paris office blocks to German-financed chemical tankers, in response to tougher capital rules from the Basel Committee on Banking Supervision. The banks sold property loans with a face value of 18 billion euros last year, up from 13 billion euros in 2012, according to PricewaterhouseCoopers LLP.
Banks typically lend no more than 65 percent of a property’s value, according to Emmett, the Cheyne partner. Borrowers wanting to raise more financing will either need to find an investment partner or seek a whole loan from a new lender, Emmett said.
Cheyne is currently financing several projects in Europe, said Emmett. They include an office building being converted to student housing in Bristol, U.K., an office property near London’s Oxford Street that will become a residential complex, and a refurbished multifamily residential building in Germany.
Loans now account for about half of the 1.5 billion pounds of real estate debt held by Insight Investment, said Guirguis. That’s up from zero just two years ago when the firm was focused on CMBS.
Hedge funds are originating whole loans because it allows them to acquire junior debt, said Thomas Jackivicz, a managing director at Citigroup Inc. in London. Hedge funds, which want junior debt because it offers higher yields, seek partners to buy the senior part of the debt, he said.
So far this year, the European CMBS market has yet to spring back to life. The only deal was the 110 million pounds of bonds backed by a shopping center in Manchester, England, sold in February.
“Immediately after the crisis there were some easy pickings in CMBS because a number of buyers needed liquidity and sold off their portfolios at significant discounts to the value of real estate,” said Emmett. “With the easy pickings now over, it makes sense to broaden out from CMBS bonds to direct lending.”