By Gilles Castiel, head of real estate loans, SCOR Investment Partners
In recent years, institutional investors have devoted part of their asset allocation to private debt markets, whether to finance corporate, infrastructure or real estate projects.
In the real estate financing segment, value-added transactions enable investors to finance both the real economy and the energy transition, providing them with multiple attractive features alongside competitive yields.
The value-added segment of the real estate market involves transactions based on an intensive asset management strategy, whether in construction, the restructuring of buildings, the repositioning of assets or the repositioning of portfolios – in other words, transactions to which the asset manager brings real added value, through customized actions and strategic decisions designed to upgrade the assets concerned.
Requiring intensive asset management and specific expertise, financing in the value-added market tends to be less crowded than in the core and core+ ones. In France, this market segment is essentially covered by French banks and a few German banks, which means higher profitability. Margins have remained relatively attractive, doing more than just remunerating the risk.
This market segment offers a fairly attractive return/capital charge combination under Solvency II regulation. It is possible to obtain yields of around 3 to 4% while immobilizing around 12% of capital on relatively short maturities (four to five years), which allows investors to renew their asset portfolio fairly regularly and adapt to market conditions.
In this market, SCOR Investment Partners favors assets that benefit or will benefit from environmental labels such as HQE, BREEAM or LEED. This positioning enables the funds to capture “the green value of value-added”.
In order to grasp this concept of “green value”, it is important to understand that the environmental regulations that emerged in the late 1990s have profoundly altered the value cycle of real estate assets, and consequently of the entire value-added market segment.
Before environmental regulations, the value of a property varied more or less in line with the real estate market cycle. Value deterioration was gradual and the landlord had little renovation to do in order to maintain the value and attractiveness of an asset. Today, it’s a different story. A building owner needs to keep pace with changing regulations and the technological environment in order to slow down the value deterioration and obsolescence of a building.
The consequences are significant for the value-added segment. Restructuring or renovating a building that complies with evolving environmental regulations creates far more value than it used to.
Nowadays, Tier 1 corporations are, for different reasons including reputation and ESG considerations, looking for sustainable buildings in which to establish their headquarters or front-office buildings. While the demand for green buildings is accelerating, the number on offer in Paris remains small. High-quality tenants must turn towards the value-added segment in order to find buildings undergoing restructuring or under construction that comply with the latest environmental rules and quality expectations. This imbalance between the demand and supply of green buildings has considerably reduced the risk of a building being left vacant at the end of the restructuring or construction period. The “green value” of value-added real estate transactions is therefore multi-faceted, providing the tenants of renovated or newly constructed buildings with lower operating expenses, an improved brand image and social responsibility compliance. For the building owners, it provides first-rate tenants, better marketing conditions (lower vacancy risk and shorter intervals between two tenants), higher rents, better overall yields and reduced building obsolescence. Finally, for the lender, the financing of value-added strategies brings total margins ranging from 2% to 3%, and offers attractive environmental and technological features that appeal to top-tier lessees and limit marketing risk.
Nevertheless, the “green value” of sustainable real assets is not a free lunch that simply involves buying syndicated or club deals. First of all you need premium market access in order to kick off a deal, before working with the owner and the bank to turn it into reality and properly structure the loan.
Secondly, a green label is not a guarantee of success. At SCOR Investment Partners we pay particular attention to the location and features of the buildings we finance. We favor assets located in the heart of the city or in strategic locations such as crossroads and metro hubs. For example, two years ago we were involved in financing the development of the Influence building, a 33,000 m² HQE/BREEAM office project located next to the future terminus of metro line 14 in Saint-Ouen, due to become the HQ of the Ile de France Region.