M&G: '100 billion financial deficit needs alternative lending'

This is not a 'fad' that will pass with the ECB's rate cut. "Alternative lenders, i.e. non-bank lenders in real estate - in Southern Europe and also in Italy - are destined to play an increasingly leading role, due to the gradual withdrawal of banks from the sector. Alternative players like us, who were one of the first institutional alternative lenders in Europe to enter the market after the financial crisis, can offer flexible and often more efficient financing than traditional banks, especially in emerging, fast-changing sectors or on real estate projects that lack stabilised profitability, lack liquidity and on which banks lack experience and track record, with overly conservative and penalising debt conditions'. This is the conviction of Dan Riches, co-head of real estate finance at M&G Investments (one of the largest alternative lenders in Europe) passing through Milan - who also recalls how the increased regulation on banks requiring a reduction in their capital will increase alternative finance in the market. "We also have to keep in mind," he adds, "that, as the data show, European real estate 'weighs' on a funding gap of around EUR 93 billion that will require resources by 2026."
With EUR 15.6 billion in loans deployed since 2009 on more than 130 transactions in 11 European countries, M&G real estate finance currently has active investment commitments of around EUR 1.4 billion. Three months ago it announced the first closing of its latest real estate debt funds, totalling over EUR 400m: EUR 230m from LGPS Central Limited, EUR 145m from the Prudential With-Profits Fund and EUR 30m from UK Insurer. The capital will be invested in multi-sector real estate loans across Europe.

"In 2023, in the US, out of 850 billion dollars of loans 45% are banked and 55% are non-banked," explains Riches. In the UK out of £50 billion, the ratio is 70 per cent bank and 30 per cent non-bank. In Europe, out of 310 billion, the ratio is 90-10 per cent. Rising interest rates have contributed to a reduction in real estate valuations, on average, of 22 per cent in the UK and 15 per cent in Europe, with peaks of 25 per cent or more in some countries, providing investors now accessing these asset classes, with lower debt bases, with reduced risk profiles'.

If in the last quarter of 2021 out of EUR 100m of value financed with EUR 40m of equity, the loan-to-value was 60 per cent, today repricing requires, for EUR 86m of value, EUR 39m of equity but a loan-to-value of 55 per cent, still a good buffer against lower asset values. Yields remain attractive and risk-adjusted.

"The €1.5 trillion commercial real estate finance market as a whole has evolved significantly over the last 15 years. Once dominated by banks, it has seen a gradual increase in the participation of alternative lenders, which in 2023 accounted for around 35% of existing debt in the UK and around 10% in continental Europe. A role that is destined to become increasingly important, also due to the effects of a more stringent regulatory framework for banks, which will have less and less ability to enter into the complexities of real estate. From residential, increasingly specialised in student housing, senior housing, build-to-rent, to data centres.

Yet despite the fact that investments halved last year, office space remains central for M&G (in 15 years it has concentrated a quarter of its resources, amounting to EUR 3.6 billion). "The office sector is not without its challenges, which mainly relate to changes in working patterns and how these affect demand and asset values. In the London area today vacancy in offices is 9 per cent, but in Grade A offices it is close to 3 per cent. Investors will go where occupiers go and reality tells us that we are witnessing a transition, the demand from businesses and corporations for Grade A office space that is efficient, functional, technology driven, low impact, with first class amenities is set to grow. In this case, office rents will continue to rise despite the still negative market sentiment. On the contrary, a lack of supply of best-in-class office space makes us positive about the sector also because the fundamentals are sound.