Private transactions may 'resemble securitisations'

With a change in the credit cycle anticipated, some UK real estate lenders are adopting a more cautious strategy. One such firm is Octopus Property, which also recently created a head of structuring role (SCI 22 June) to help broaden its investor base, while employing securitisation-like funding methods.

Mario Berti, ceo of Octopus Property, comments that the firm has scaled up by utilising a range of funding methods and has now provided more than £3.3bn in total lending since inception. Having become established as a bridging lender, the firm now spans the commercial, residential, buy-to-let and development sectors and lends around £60-80m a month.

Berti stresses that while the firm is not a bank and does not utilise bank funding lines, this is an area that it is looking at “closely” following the appointment of Matthew Pritchard to head of structuring. He adds that the company has typically utilised a “broad range of discretionary capital” that enables them to lend “quickly and confidently”, which banks are not able to do, mainly due to their size.

The firm is now looking to push forward with this growth, but by utilising a slightly different funding approach, particularly as the wider macroeconomic outlook becomes less stable.

Pritchard comments: “We’re arguably in the late stages of the credit cycle, so we’re preparing by deploying capital into more defensive markets. This means providing lower leveraged, but larger, loans, which may therefore be of lower cost to borrowers.”

“We have typically” he continues “provided smaller, higher interest rate loans to smaller developers and we want to increase our portfolio weighting to more defensive loans.”

As such, the firm is now looking to lend to larger, more institutional residential developers and homebuilders. Pritchard adds: “A part of this too will involve a different borrower mix, for example targeting more borrowers in the regions with good economic growth prospects and high local employment rates.”

In line with this, the company is hoping to broaden its investor base and so reduce the cost of its funding sources. A part of Pritchard’s new role, he says, will therefore involve engaging with new investors, particularly those not as familiar with Octopus Property, and to find, he says, “mutually beneficial opportunities to co-invest.”

In terms of what these investors may look like, Pritchard says that the firm will target the “full range of investors from asset managers, credit funds, non-banks and insurers”.

He comments that while traditional securitisation is not on the table right now, it might be something they will look to utilise in future. In the meantime, however, Pritchard will oversee the execution of private deals that will share similarities with securitisations.

“We are interested”, illustrates Pritchard, “in exploring bespoke private transactions done on a bilateral basis and, while these may not be rated or traded, they could be heavily structured and resemble securitisations.”

He continues: “These deals can offer illiquidity and structuring premia as investors’ ability to trade them is more limited, due to some complexity as they are secured exposures with additional structural protections from covenants,” he explains.

While issuing a public securitisation has its benefits, Pritchard says that there are a number of drawbacks, including the time and expense involved in the process. Additionally he says that the firm does not yet need to tap the ABS market, as they have competitively priced funding from a variety of sources.

While Pritchard also concedes that appetite for ABS might be strong, he has seen equally growing appetite for private debt and real asset transaction. He concludes that this appetite is being seen across a range of institutional investors - including credit funds, asset managers and insurers - that see the benefits of lending to UK borrowers, secured by real assets.

RB