‘Debt funds, alternative lenders in the real estate market, have a big role to play’

Interview with Benjamin Debré, Real Estate Debt Fund Manager, Sienna Private Credit

What financing trends have you observed among real estate investors?
The sudden surge in interest rates by around 400 basis points (the Euribor having risen from 0% to 3.80% in the space of a few months) has triggered a fall in transaction volumes. This volume dropped by 61% – down to €65bn – in commercial real estate in Europe for the first half of this year. And Savills expects a 44% decrease over the full course of 2023. We are seeing a freeze as many sellers are not yet ready to take the price drop into account. Banks have sped up this trend by reducing the production of new loans to focus on managing their current loan books (broken covenants, extensions, amendments, and event of defaults).

How will the market of real estate financing evolve in this context?
A refinancing wall is emerging for commercial real estate investors. AEW expects it to reach €93bn over four years (spanning over the 2023–2026) on the French, German, Dutch, Spanish, Italian and British markets. These investors will have to face much stricter conditions due to a decrease in leverage from 65% down to 50–55%, combined with valuations being adjusted downwards. With this outlook, private debt funds have a big role to play as alternative lenders, especially in the mid-market segment(between €10–50m loan size). This market segment is currently the most active one – it is also the market in which Sienna Private Credit has traditionally operated.

Sienna Private Credit lends directly to real estate players. How is that an advantage in this context?
Direct lending to investors is an advantage because it allows Sienna Private Credit to cherry pick the transactions we want to finance in terms of sponsor, asset class, business plan, location etc. It allows us to offer a tailor-made structuration and loan documentation, which is of the utmost importance in this turmoil. Being sole lender in any given transaction puts us in the driver’s seat when it comes to discussing with the sponsor the evolutions of the loan, without being dependant of an third-party agent.

How do you take into account new trends underway in the commercial real estate market?
The real estate market has evolved considerably in the recent years Changes in use of office space give rise to needs for huge investments to answer these new trends. For example, plans to transform redundant office space into accommodation units are large-scale projects: they require extensive discussions with local authorities about planning consent, needs to build new amenities for residents (infrastructures, networks, schools, shops…). Novaxia believes that 20% of the Greater Paris office stock is obsolete – that amounts to close to 11 million sqm which will need to be converted in a way or another. All of these projects assets won’t be viable, it will be our role at Sienna to select those we believe in..

‘We have opted for a policy of incentives through an impact strategy in real estate debt’

How do you apply an impact strategy to the asset class of real estate debt?
Sienna Private Credit has launched the first impact real estate debt fund in France in, 2021. Through impact clauses, we sought to apply a policy of incentives for real estate owners, rather than a policy of restrictions. Together, we set goals to improve the environmental footprint of buildings with regards to energy and water consumption, greenhouse gas emissions and waste management. Commitments have to be made concerning the extent of possible capex and the margin is adjusted upward or downward according to their implementation. The improvement of a building’s environmental footprint has an effect on its liquidity, both on the investment and rental property. We focus only on assets that needs and can be repositioned according to the latest climate pathway, supporting their ecological transition.

What resources do you draw on at Sienna Investment Managers?
Sienna Private Credit is part of Sienna Investment Managers. Beyond its in-house team dedicated to private real estate debt, it benefits from the support of the investment teams of Sienna Real Estate. In today’s period of transformation and uncertainty in the real estate market, it is crucial to get the local knowledge from around a hundred local experts in France, Germany, Spain, the Netherlands, and the UK with their deep understandings of their local markets. To that effect, we have built strong synergies to underwrite assets and business plans comprehensively and not only through the sole lens of financing – and this to the full benefice of our investors.

What new initiatives have you taken in light of today’s context?

We are working on a new initiative in impact real-estate debt that will be tailored to the new paradigms of our market.. We will be focusing on whole loan and mezzanine financing on the mid-market segment in the different European countries where Sienna is present, across all real-estate asset classes (including office space, housing, logistics, hotels, and co-living for seniors and students). The rate of returns expected today in this market segment is close to equity – at 8–10% – with a risk profile inherent to real estate debt.