TH shows faith in the UK with £500m debt fund launch

The real estate investment manager will provide whole loans through its second vehicle focused on the country amid ‘strong interest’ in the market despite Brexit uncertainty.

Uncertainty caused by the UK’s exit from the European Union will not diminish the opportunity to lend in the country’s commercial real estate market, TH Real Estate has insisted on the launch of a £500 million (€566 million) UK property debt fund.

The real estate investment manager is launching its second commingled debt vehicle, Global Real Estate Debt Partners – Fund II (UK), to continue its lending strategy in the country. The firm has scaled up the fundraising target for its second vehicle compared with its maiden UK fund, which raised £255 million by 2014.

The firm has seen strong demand from institutional investors which are allocating increasing amounts of capital to debt to complement their equity exposure to real estate, Christoph Wagner, TH Real Estate’s director of debt strategies told Real Estate Capital.

“Brexit uncertainty weighs on people’s minds,” Wagner acknowledged, “but we continue to see strong interest in property debt in the UK.”

Fund II has reached a first close on an undisclosed volume, with a final close targeted before the end of the year. Investors at this stage include Asian, US and European institutions, Wagner said. UK pension funds with sterling-denominated liabilities have shown strong interest, he added.

TH Real Estate has a significant track record in the UK commercial real estate lending space. Through the first Global Real Estate Debt Partners fund, the firm has deployed £300 million across nine loans. In addition, the firm lends on behalf of its US-based parent company as well as through third-party mandates including for The Korean Teachers’ Credit Union.

The latest UK fund will provide whole loans secured on well-located core assets across the country’s South East as well as other regional markets. It will provide whole loans of up to 75 percent loan-to-value, targeting an 8-9 percent gross IRR and 6 percent net income return. TH Real Estate did not disclose its first debt fund’s returns, but said they are in the single digits.

“With debt investments, we are not relying on market improvements to generate returns, we will benefit from a stable environment where there’s no massive correction of property values,” he explained. “The UK market has liquidity, transparency, volume, sophistication of lenders and borrowers and a good economic and legal environment.”

Wagner continues: “In our view, the lending market in Germany and France is heavily supplied by the local banks, which provide high loan-to-value ratios, so we think the strategy we have with our fund is particularly well-suited to the UK market.”

At the same time, lending margins in the UK offer a “positive gap” compared with the French and German markets, he notes. In the senior lending space, margins in the UK offer a premium of 40 basis points over France and as much 50bps over Germany, according to a recent report from CBRE.

TH Real Estate’s strategy will involve syndicating senior elements of selected whole loans. Typically, the firm will retain on balance sheet those whole loans secured against assets with a value-add business plan attached to them. The senior element of loans secured against stabilised assets will tend to be syndicated, with the firm retaining the mezzanine tranche.

“This gives us flexibility to look at the broad range of lending opportunities and then retain the right portion of the capital structure for our fund in terms of its return/risk profile,” Wagner explained.

The fund has already commenced its investment programme with a £44 million loan secured against a retail asset in the south east of England. With a sweet spot for lending of between €30 million and €50 million per asset, the strategy now has a “very attractive pipeline of deals”, Wagner adds.