ING Investment Management (ING IM) believes commercial real estate loans as an asset class are the most attractive they have been for eight years.
According to the company, this is because underlying commercial real estate valuations are improving, while returns on loans to the sector are still very attractive.
The investment manager believes the asset class is undervalued with prospects for growth, and that it fits the profile of many institutional investors searching for yield in the current low interest environment.
Based on these market developments ING IM and ING Real Estate Finance (ING REF) have entered into a partnership agreement to provide a service to institutional investors by building bespoke portfolios of commercial real estate loans. They have already won a mandate from one client to do this for. Nationale-Nederlanden Life company has funded this initiative with already more than EUR400 million, with the potential to grow to a total of EUR750 million.
Peter Göbel, CEO of ING Real Estate Finance Netherlands, says: “This new and unique proposition allows ING REF to leverage its origination and lending capabilities to bridge the gap in the market between capital providers looking for attractive spread products, and real estate companies seeking loans for acquisitions and refinancing. This partnership will bring additional liquidity to the commercial real estate loans market and could provide attractive returns for institutional investors who are providing the capital.”
ING IM says there are a number of factors that make commercial real estate loans an attractive asset class for investors:
• After a prolonged downturn in commercial real estate in most European countries, valuations have stabilized or are increasing
• Another sign of recovery is the increase in the number of real estate transactions and subsequent lending across Europe. In 2013 commercial real estate transactions totalled almost EUR66.5 billion, and subsequent lending in Europe has seen EUR28 billion worth of real estate loan portfolios being bid for across the continent2 For the US issuance of the asset class has increased by over 3,000 per cent from USD2.7 billion (EUR1.97bn) in 2009 to USD86.1 billion (EUR62.8 billion) in 20133 on the back of the earlier signs of economic recovery
• In Continental Europe the sector depends heavily on bank financing due to its size and capital intensity. Due to the ongoing financial restructuring and constraints, many banks are still reluctant to lend to this market. As a result, supply and demand of these loans is still inefficient and the market needs additional liquidity. This partnership helps to provide liquidity by bridging the gap towards institutional investors to access this market.
Jelle van der Giessen, chief investment officer at NN Group, adds: “We believe stepping into commercial real estate loans now is the right moment in the cycle. This investment fits our strategy to participate direct into the real economy through asset classes such as infrastructure and commercial real estate loans, which is of increasing interest to insurance companies.
“Investing in commercial real estate loans is a good diversifier for insurers, but you really need to understand the asset class well. Pension funds and insurance companies can benefit from this partnership as they can now access this market through this proposition bundled around joint skills. The combined in-house expertise ensures we get the loans that meet our investment criteria which we can properly monitor and administer.”
ING IM expects significant inflows from institutional investors into commercial real estate loans based on the attractive characteristics of this asset class. Clients are looking to increase their allocation towards illiquid assets in their search for yield and to diversify their portfolio. Commercial real estate loans are a good fit in that strategy.