The banking crisis may have changed the landscape of property finance forever. Some major bank lenders have quit the market, and others have drastically scaled back their activities. But one group of cash-rich lenders – the big insurance companies – see the departure of the banks as a strong opportunity.
Insurers have long been investors in the property sector, but their growing involvement is expected to take off over the next few years. In 2011, they accounted for 14% of all UK property lending, up from 13% in 2010. In the US, insurers make up 20% of the property lending sector, and market experts believe that, in time, insurers here will take up a similar share in the UK.
“Regulation is coming to confront bank lending,” says Bill Hughes, managing director of Legal & General Property. “The banks are now working on a completely different canvas and that has created a market opportunity for the insurance industry.”
L&G’s intentions are clear: last year the insurer set up a new property investment department and it is said to be prepared to invest billions of pounds in the UK property market.
Other leading insurers are also making their mark: Aviva made more than £650m in loans during the first half of 2011, French company Axa plans to invest €2.7bn in property across Europe, and at least eight other insurers are gearing up for a shift into property lending, with others expected to follow.
London, as the safe bet of the UK property market, looks well placed to attract cautious insurers’ money.
“We are strong believers in London’s future and its fundamentals as a business location,” says Anne Kavanagh, Axa’s global head of asset management.
“As a result of the 2008 financial crisis almost all developments in the city which were underway were mothballed and very few have restarted since,” she adds. “Therefore, we foresee a dearth of available prime modern space in the City of London starting from 2013 when we believe demand will outstrip supply.”
Axa Real Estate’s development programme for the City aims to deliver more than 500,000 sq ft of space in 2013, and recent deals include two rare speculative developments, 6 Bevis Marks and Sixty London, according to Kavanagh.
Other insurers are biding their time, building up property teams and expertise before entering the market.
L&G’s Hughes believes that the insurance companies will be highly risk averse. “The focus of lending will be on good quality assets,” he says. “I don’t think insurers are likely to want to provide speculative funding – that is going to be a very different market.”
Ian McGruer, a partner at Cluttons, agrees: “By definition, the investments will have to be pretty first class, with a good covenant that will be around to pay the rent.” On the whole, he adds, insurers are looking for long-term income streams to match long-term liabilities, and most are interested only in bigger deals of at least £15m.
Axa’s Kavanagh says that her company is focusing on senior debt facilities for “prime income-producing assets such as City of London offices”.
Where the insurers lend, the terms are appealing: maximum loan-to-value ratios offered by insurers in the UK market are around 69%, with typical margins of 2.4%, compared with the market average of 66.2% and 2.6%, says Natale Giostra, a senior director at CBRE. Insurers’ arrangement and commitment fees are also significantly lower than those of the banks.
One factor that had been expected to boost insurers’ investment in property was the treatment of different types of property exposure under the upcoming Solvency II requirements on EU insurers, which would have made mortgage lending less punitive than other forms of debt. But, says L&G’s Hughes, this anomaly was removed in the latest drafting.
Many in the industry don’t believe that insurers will be the funding panacea for the property sector. According to the PwC/Urban Land Institute 2012 Emerging Trends survey, the billions of pounds the insurers have available will not come close to filling the void left by banks.
Furthermore, many investors view London as overpriced. The survey ranks it only 10th of 27 capital cities favoured by investors, down from third last year.
Nevertheless, the insurers remain upbeat. Solvency II’s capital requirements for property debt are less draconian than those of Basel III and the other layers of new bank legislation.
German insurer Allianz is considering a move into mortgage lending across Europe. Currently, Allianz’s focus is on Germany, but when it comes to the amount of cash the firm is prepared to invest in European property, Allianz chief executive Olivier Piani has been quoted as saying: “The sky’s the limit.”
So while the insurers might not be able to plug the UK’s property development gap, it certainly appears likely that they will improve the market outlook.
