Despite continued uncertainty around the strength of the UK’s economic recovery, Christian Janssen, head of commercial real estate debt in Europe for Nuveen Real Estate, says there is no shortage of financing opportunities in the country’s property market.
The investment manager this month launched its third commingled lending vehicle dedicated to the country. A first close, on £140 million ($194 million; €164 million), has been held, with Nuveen aiming to raise £500 million.
“We are bullish about the UK,” Janssen told Real Estate Capital. “There is a huge amount of deal volume. Literally every day we see potential financing deals which suit a wide variety of lending strategies, including from senior loans to value-add.”
Demand for construction finance is particularly strong, he added. “That is a leading indicator because it shows people are gaining confidence. There is not much stock in the pipeline for the coming few years, so people are launching schemes which will be delivered in three, four years’ time. The expectation is covid will be in the past, or we will have learned to live with it, and Brexit will have bedded down and the economy adapted to it.”
Nuveen lends on behalf of its parent company, US insurer TIAA, as well as external investors through commingled funds and separate account mandates. Its European lending has so far been concentrated largely on the UK. Nuveen closed its first UK-specific debt fund in 2016 on around £300 million, followed by a second fund, which closed on circa £350 million in 2020.
The company’s success deploying those funds encouraged the launch of the latest vehicle – Global Real Estate Debt Partners – Fund III (UK), Janssen said: “The first fund is fully deployed, and the majority of the capital has been paid back. The second fund’s investment period ends shortly, so it was time to launch the third one.”
For the second fund, Nuveen targeted an 8-9 percent gross IRR. For the third iteration, it is targeting 6-8 percent, which Janssen said reflects increased investor caution.
“It is slightly lower than the second fund, because there are additional uncertainties in the market – Brexit, covid, the late cycle – and the feedback from investors was that they would rather be a little safer than get an extra 50 or 100 basis points return. In an interest rate environment that is still so low, an average 7 percent net return, predominantly in quarterly cash dividends, is pretty good.”
Janssen described debt investment as a “sweet spot” in the market, which offers investors income combined with downside protection against short-term volatility. He said this could be achieved by lending against assets in liquid investor and occupier markets as well as through cautious and well-structured loan terms. “It is important to structure loans so that if the sponsor’s business plan is missed by 10 or 20 percent, you are still covered on a debt basis,” he said.
Janssen added that Nuveen’s fundamental lending approach had not changed, despite the uncertainty caused by the pandemic. It continues to target well-located assets, owned by experienced sponsors, which require some capital expenditure, leasing or active asset management.
“The fact we are seeing so many potential deals means that we can be selective,” he explained. “People have asked whether we will be able to deploy our capital amid the competition to lend. But we see billions of pounds of potential deals that could be suitable for our strategy, which provides the ability to select which deals we are comfortable with.”
Nuveen is near to closing a first loan for the strategy, which will finance a centrally located London office building with ground floor retail. Janssen added that a second deal, in a sector he said some lenders may consider challenged, is also underway, albeit on defensive terms. “We like to identify deals where the risk is mispriced or misunderstood by others,” he commented.
Looking forward, Janssen said Nuveen is considering expanding the remit of its fund series to Continental Europe, with a potential follow-on strategy to come in the first half of 2022.
“Our plan on the debt side was to prove that we are experts at what we are doing by building up a track record in the UK, and eventually exporting that track record,” he said. “The strategy has been successful in the US and the UK, so Continental Europe is a logical next step and is a market we understand from an equity investment perspective.”
In total, Nuveen’s debt platform has more than $41 billion of capital invested across the US, Europe and Asia-Pacific, on behalf of its separate account mandates and commingled funds. The European debt team originated more than £500 million of new loans in the first half of 2021 in sectors including logistics, residential, life sciences and offices.