Hermes’ £400m debt fund makes first three loans

The senior real estate debt fund has finance three UK shopping centres.

The Hermes Real Estate Senior Debt Fund has financed three UK shopping centres, its first loans since the £400m UK fund was launched in 2013, PDI sister title Real Estate Capital reported.

The fund was setback last year when its first manager, Marcus Palmer, quit before it had deployed any capital. There was then a six month hiatus while new manager, Vincent Nobel, was recruited from M&G Investments.

Nobel said the three completed loans, a mix of floating and fixed-rate transactions, were for two borrowers and totaled between £50m and £60m.

The fund has made two loans to Vixcroft, the specialist secondary retail owner and asset manager set up by former directors at Arrowcroft. One is for the 200,000 sq ft Nicholsons Centre in Maidenhead which Vixcroft recently bought from Irish Life for £37m, a c6.2% yield.

In 2007, Irish Life paid £85m for the mall, which has more than 60 shops.

The other is secured on the 118,000 sq ft Sovereign Centre in Weston-super-Mare which Vixcroft snapped up from Standard Life for £30m, at an 8% initial yield. Both schemes have vacancies.

The third loan was made to a different borrower, against a retail and leisure precinct in a town in Kent.

All the deals reflect loan-to-value ratios of 60%-65% and the maturities vary from three to six years. The loan on the Sovereign Centre is on a fixed-rate basis.

Nobel said all the loans “exceeded our target return” which is thought to be Libor + 200-250 basis points, down from the Libor + 250-350bps target at the time of the fund’s original launch.

He said the fund had also changed its parameters to incorporate a much wider range of investment opportunities. Its original focus was exclusively retail, industrial and offices in London and the South East.

“When I started in January, I wanted to make some changes”, Nobel said. “Where we previously were looking at a retail, offices and industrial subset we will now look across asset classes, including operational assets. I didn’t want to be beholden to a specific subset. We also have increased the limit of the LTV, to 70%.

“Hermes has a lot of experience around offices and retail, but that doesn’t mean we can’t look at other asset classes. In an environment where yields are coming down in the London area and main cities, it is about picking the right assets with good relative value.”

Nobel said his team will focus now on deploying the rest of the capital, which was committed by Hermes’ main client, the BT Pension scheme, during the next 12-18 months. Hermes plans to raise further capital down the line “either within a fund or by adding separate mandates”.