03 May 2013

Risk.net: US insurers target European CRE debt

American insurers are increasing their investment in UK and European commercial real estate debt, as domestic insurers struggle to meet burgeoning demand. Large US groups have been quick to fill the void left by European banks' withdrawal from long-term financing.

Large US groups, including New-York-based MetLife and Massachusetts Mutual (MassMutual), have been quick to fill the void left by European banks' withdrawal from long-term financing, hoping to take advantage of yields on CRE loans that are more attractive than those available in North America.

In March, MetLife announced it had become the largest portfolio lender in the insurance industry in 2012 with $43.1 billion in commercial mortgages, of which $1 billion was for UK properties. This included a $264 million loan on the Broadgate West office complex in London and a $200 million loan on a portfolio of retail units.

Paul Wilson, London-based regional director, real estate, at MetLife Investments, says: "What's driving it is that CRE lending has become very competitive in the US very quickly again, but it still feels like there's opportunity in the UK and Europe for US lenders to get some additional spread".

The more fragmented market in the US means US insurers typically have fewer reservations about exploring CRE opportunities in other jurisdictions. Prior to the financial crisis, around 90–95 per cent of the CRE debt market in Europe was catered for by banks, whereas in the US there was a more even distribution between banks, insurers and commercial mortgage-backed securities (CMBS) investors, according to Axa Real Estate.

Analysts say US insurers' greater expertise in CRE financing has allowed them to become established in this space faster than their European peers as finance from banks has diminished. Justin Curlow, senior research analyst at Axa Real Estate in London, says: "With such a historically bank-dominated market in Europe, as soon as you take away that supply of loans, it allows new lenders to come in and take advantage of the market's supply-and-demand imbalance".

The influx of US interest is expected to boost European insurers' investment in CRE debt. A large proportion of European CRE loans are three-to-five years' duration, which does not perfectly suit the needs of life insurers, which prefer longer-dated assets to back their liabilities.

With banks exiting the markets, experienced insurance investors are attempting to negotiate longer maturities with debtors, which in turn are encouraging more European insurers into the loan market, according to David Dowling, director, insurance and pensions solutions, at Deutsche Bank in London. "[Insurers'] hands have been strengthened massively by the banks coming out of the market. What we see is if we have a five- or seven-year transaction to place, insurance companies will come to the table and try and negotiate a longer term with the sponsor", he adds.

Longer maturity loans could slowly become the norm as insurance players become established in the CRE debt market. MetLife's Wilson comments: "We lend across a spectrum from three years to 15–20 years plus. We have the majority of our lending spend in the five-year space, filling the gaps left by the banks. That's what borrowers in the UK are used to. But that might change over time as borrowers become more flexible around insurer-type lending."

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