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Trust Insider: has property credit escaped the shadow of 2008?
by James Carthew on Oct 04, 2013 at 11:47
Following last week’s article on TwentyFour Income (TFIF), I thought I would look at the growing sub-sector of real estate finance investment companies, including Starwood European Real Estate Finance (Swef) and ICG Longbow UK Property Debt (LBOW). But first I think it is worth looking at the two older funds in this sector, Duet Real Estate Finance (Dref) and Real Estate Credit (Reci).
The sub-sector has net assets of about £470 million. Around half of that is accounted for by Swef, and LBOW is £100 million so the other two are a bit small (relative to the bulk of recent new issues). Reci has just announced it is planning to address this with an issue of shares; it will be interesting to see if it can pull this off.
The fallout from the credit crunch is still having an impact on the property lending sector. Many loans made at the height of the bubble need to be refinanced over the next few years but banks still need to shrink their balance sheets. This should be a boom time for new lenders but some funds in this sector seem to have taken a long time to get their issue proceeds invested.
Dref, which launched in February 2011 and principally provides mezzanine finance to the European commercial real estate sector, did not complete its last investment until May this year despite indicating at launch it would be fully invested within 12 months. Shareholders got itchy feet in the meantime and at one point the shares were trading in the 80s.
Dref makes its investments via a master fund, a Cayman-domiciled limited partnership. By May 2013, this had made 13 loans and two commercial mortgage-backed security investments secured against a range of European properties with a bias to offices and hotels and the UK and Germany.
These had an average 70% loan to value ratio and a coupon of 9.8% (normal cash interest) and 2.1% for payments in kind. The net asset value (NAV) has barely changed since launch but Dref believes it can pay dividends over 7p per share in its current accounting year. These are fluctuating a little as it hedges its euro exposure back into sterling.
Dref’s fees (charged at the master fund level) are fairly high, at 1.5% of capital invested plus 20% of any return on a loan over 7% per annum. My only major moan however is it is quite hard to get detailed information on the company.
For some reason, the shareholders are not permitted to know who they have lent money to. I find this disconcerting, especially as one loan seems to have run into trouble (although they say shareholders will not lose out as a result). Also the fee information is not disclosed in Dref’s accounts – I found it in the prospectus, which I could not find on Dref’s website.
It is unclear to me what Dref’s board has in mind for the future. The master fund’s life comes to an end in 2014, though it can be extended by a couple of years. Dref is not really in a position to raise more money now, unless the managers are ready to launch a second master fund.
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