By Daniel Hunter
Insurance groups are expected to play an increasingly significant role in the provision of UK commercial real estate (CRE) loans, according to research published by global law firm DLA Piper.
The research, Searching for investment: insurers as lenders, was conducted in collaboration with the Centre for Economic and Business Research (Cebr).
Key findings are:
- Analysis suggests that insurance groups will increase UK CRE lending by £28.1 billion over the next five years bringing their total CRE lending stock to £52 billion by 2017. Annual lending by insurance groups is expected to rise to up to £5.5 billion by 2017
- Loans to CRE from insurance groups will be typically medium dated, with terms between 7 and 10 years, and may feature higher Loan-to-Values (LTV) than the current market norms of 50 per cent to 65 per cent
- The lending will primarily take the form of senior loans on a bilateral, rather than syndicated, basis and will often include gilt-based interest rates and make-whole pre-payments
- Annuity funds are the most likely source of insurance lending to CRE given the longer term nature of their liabilities, the historic use of bonds as investments and the current need to improve annuity rates against falling debt yields
- Core assets sought by annuity funds will be retail and office space with a preference for prime and high-quality properties in central locations, principally in London and the South East
Insurance companies are expected to draw primarily upon annuity funds in order to lend. Annuity funds are the most likely source of lending to CRE given the longer term nature of their liabilities, historic use of bonds as investments and current need to improve and secure annuity rates against falling debt yields brought about by UK monetary policies of low interest rates and the UK Government's quantitative easing programme.
Insurance companies are typically looking at loan lot sizes of £50 million and above for terms of between seven and ten years, backed by prime assets, predominantly retail and office space based in London and the South East. Other key sectors, such as student accommodation, warehousing and distribution and some other public sector projects will also be considered.
The research found that most insurance groups may be willing to lend at higher maximum LTV ratios than the current market average of 50 to 65 per cent. Over the forecast period, the research showed that insurance groups are unlikely to provide development finance or loans for residential real estate investments or other assets with heightened risk profiles.
"Whilst the number of insurance companies active in this space is currently fairly small, the expected returns from CRE lending have an attractive profile and we will see more insurance groups move into the market," Simon Cookson, partner and UK Head of Real Estate at DLA Piper said.
"We expect insurance groups firmly to establish their position as lenders, and once they have put in place the requisite in-house infrastructure and expertise, insurers’ provision of CRE lending should continue to expand into the market recovery."
Toby Barker, partner and Head of Real Estate Finance, London, at DLA Piper added: "there has clearly been an increased level of activity by insurance company lenders in the real estate debt market over the last 12 months. You only have to look at the number of headline deals involving insurers to see that. This throws up a number of questions about the drivers behind it and what the impact will be on the market. Our research has examined the background and presented some insightful answers to those questions."
The study involved a primary research phase, in which Cebr undertook 20 in-depth interviews with a range of mid-tier and senior executives from insurance companies(some of these companies were already active lenders (through investment management arms or their property teams), some were not contemplating entry into the lending market), equities analysts who monitor and research the insurance sector, representatives of regulatory bodies, other industry stakeholders and the Association of British Insurers (ABI). Insurance group participants were generally either from the groups’ investment management arm or their in-house property team.
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