Barings, the US-headquartered investment manager, has secured a £250 million (€290 million) real estate debt mandate from The Phoenix Group, the UK insurance services provider, PDI’s sister title Real Estate Capital can reveal.
Phoenix, which describes itself as the UK’s largest long-term savings and retirement business provider, issued the mandate for its matching adjustment portfolio, though which it holds long-term assets to match liabilities.
Barings will create a portfolio of investment-grade UK commercial mortgage loans across a range of sectors, with a focus on industrial, residential and offices spread across the country. Targeted loan sizes will range between £30 million and £200 million.
Sam Mellor, head of real estate debt for Europe and Asia-Pacific at Barings, said it is targeting a premium to corporate bonds for the mandate. “We need to make sure there is a premium to what equivalent credit quality corporate bonds are trading at. That figure can obviously change over time.”
The mandate’s focus on senior lending is, according to Mellor, a reflection of investor demand in the current market environment. “Investors are looking for yield, and some insurance companies, including Phoenix, are making investments that match their regulatory capital requirements while providing them with attractive yields, which is why senior mortgage real estate lending is a very attractive product for them now,” he said.
Mellor added that loans provided on behalf of the mandate will have a term of between five and 50 years, to match Phoenix’s investment duration targets.
The mandate’s conservative lending profile also matches the risk-return profile of the insurer, he said. “The loans will be provided to high-quality assets and sponsors. We will be generally looking at loan-to-values of 60 percent or lower for sponsors that want to hold their properties for a reasonable period of time.”
The manager has already agreed to its first deal for the mandate: a £30 million first mortgage loan on a 30-year term, with a loan-to-value below 50 percent, secured against a mixed-used office and retail property on Tottenham Court Road in London. “As the banks retrench from the UK lending market, we continue to see a healthy pipeline of opportunities,” he added.
Barings – which primarily provides real estate loans in Europe on behalf of its parent, the US insurer MassMutual – told Real Estate Capital in a November 2018 interview that it was aiming to expand its sources of capital to include third-party investors. At the time, Chris Bates, head of Europe real estate debt origination, said: “Just as we have moved away from having a single source of capital in our US platform to create a diverse capital base, that is the plan we have for Europe.”
Speaking after agreeing to the Phoenix mandate, Mellor described a market which is benefitting from a growing appetite for real estate debt from insurance companies. He said the asset class has a particularly attractive risk-return profile for institutional investors, as it meets their needs for returns in line with their liability structures and portfolio diversification.
According to Mellor, it also fits their regulatory needs. “Insurers across the world are highly regulated, with specific rules around their capital requirements and the quality of the assets they are allowed to invest in so, low-leverage, high-quality real estate mortgage loans are a really good fit for insurers,” Mellor said. “If you can find this kind of asset and deliver a premium to the corporate bond market, it is a very attractive investment proposition.”