Property fund managers could be the next group in financial markets to fill the partial credit vacuum as banks reduce lending, according to the chief executive of international real estate fund managers Cordea Savills.
Private equity managers, government agencies and even hedge funds have become lenders to credit-starved businesses, and other borrowers unable to obtain credit through traditional channels since 2008.
Increased regulatory pressures on banks to cut their risk and increase reserves, and general risk aversion have created the vacuum.
It is here property fund managers could play a role, says Justin O’Connor (pictured). It would be an extension beyond bricks and mortar holdings by property fund investors, or building then selling property – in the case of developers.
It would also be a step further for the mainly-institutional client base of property fund managers.
“Before, the [property fund] business was about buying and selling direct property, now it is about different products you can offer and giving clients what they want in terms of risk-adjusted returns,” says O’Connor.
“An institutional investor may want to put money into European property, and say they don’t mind if it is in equity or debt, they just want a set return.”
Cordea Savills runs $5.1bn mainly in European property funds, but is not yet active in this evolving area. However, O’Connor says there are signs some insurance companies are interested. His firm took $700m of institutional mandates last year.
“A lot of non-performing loans are coming to market [from the banks] but other portfolios that are performing are, too, and banks might not want them because the banks are getting out of the business. There is a real role of investors to take on the role of lenders, too.
“If you provide senior debt at 5% which will stand before the equity, and by lending 50% on a property where you can underwrite and which you understand, then you can get a 5% coupon and have risk lower than the equity.