[Interview] DRC plans to launch Europe whole loan fund in 2019

Despite prospective interest rate hikes, European real estate debts will offer attractive risk-adjusted returns in the short to medium term, given the high spread between property yields and interest rates and as non-bank lenders are filling the gap left by traditional banks in the real estate market, he noted.

“DRC has launched UK whole loan fund and intends to launch European whole loan fund early/mid next year which Korean investors have already expressed interest in,” Crossfield told the Korean Investors in a recent email interview.

“Given that the current spread between property yields and interest rates is at a near historic high, we feel that there is sufficient capacity for interest rates to rise without unduly affecting the European real estate market,” he added.

Savills IM expects gradual interest rate increases in Europe.

The UK-based property investment manager acquired a 25% stake in DRC last August to expand debt lending strategies. It intends to take over the remaining 75 per cent in 2021.

The interview was conducted during his visit to Seoul to which Dale Lattanzio, managing partner of DRC Capital, accompanied him.

Crossfield gave no further detail on the target size of the European whole loan fund.

The recently-closed UK whole loan fund surpassed its initial target size of 500 million pounds and attracted mainly public and private pension schemes based in the UK. Its target return is around 7%, according to Real Estate Capital.

To South Korean institutional investors exploring a broader range of alternative investments in sesrch of higher and stable yields, he recommends senior lending and whole loan strategies.

Whole loans typically take leverage of up to 75~85% loan to value (LTV) ratios seen in mezzanine loans, while senior debt is currently limited to about 60~65% LTV.

Whole loans secured against European real estate offer yields of 7~8% per annum, far above 3~4% from core investment-grade senior lending in Europe.

In comparison, higher risk strategies such as mezzanine and subordinated lending offer net 10~13% returns, according to Crossfield.

Additinoally, South Korean investors would earn a hedging premium of 0.5~0.6% point to 0.7~0.8% point from investing in pound and euro-denominated assets, respectively. In contrast, they need to pay over 1% point in dollar/won currency swap following US interest rate hikes.

Savills IM has made direct investment of more than 700 million euros ($794 million) in Europe with South Korean investors over the last 10 months and is hoping to achieve 1 billion euros by end of this year.

“We are in discussions (with South Korean investors) about a number of equity and debt opportunities, as well as ways of investing into existing or planned co-mingled funds and more value-add and semi-blind strategies,” said Crossfield.

“We are confident this will increase again in 2019 in both equity and debt, and in Europe as well as Japan and SE Asia.”

Currently, Savills IM has 16.6 billion euros of assets under management across UK, Europe and Asia Pacific. DRC is solely dedicated to UK and European commercial real estate debt with AUM of 2.9 billion euros.

By Daehun Kim

daepun@hankyung.com