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The European commercial real estate (CRE) lending market is currently awash with an oasis of interest when it comes to the deployment of CRE CLO’s as a means of financing loans secured by CRE. To date, debt funds that have financed CRE have been reliant on a myriad of sources of capital including pure equity, loan-on-loan facilities or repo lines. However news that Starz Real Estate successfully brought to market Europe’s first CRE CLO can be considered a game changer, as this is a financing tool that not only provides a better weighted average interest rate when compared to other forms of debt, but also much improved advance rates. Economics aside, if you consider that the debt fund will continue to have an active role in dealing with the borrower, including in relation to modifications and waivers as well as far reaching consultation rights with regard to material actions impacting the underlying collateral, then you can see the attractiveness of this technology.
CRE CLO’s are ideal for financing more transitional assets which, in today’s market, there is no shortage of supply given that property owners are faced with a once in a generation task of having to reposition and improve assets for a not only post pandemic world but also a world where ESG principles have become centre stage and are actively being embraced.
Given the outstanding fundamentals of this product for investors, property owners, debt funds and banks alike, it is safe to say that the emergence of a large bourgeoning CRE CLO market is not just “on the cards” but very much a fait accompli. Given the clear benefits (including the economics), then debt funds have little choice but to embrace CRE CLO’s to stay competitive in the CRE lending market. Ultimately, the arrival of the CRE CLO on European shores can be considered a truly positive disrupter which market participants risk ignoring at their peril.
On a personal level, I am very excited about CRE CLO’s and the vital role that this can play in the European market. To the extent that anybody has any questions or queries on any aspect of these structures then please do not hesitate to get in touch.