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Investment process

Our real estate finance team draws on its expertise in fundamental real estate, mortgage, risk and capital markets to create a comprehensive investment analysis process.

The complete investment process is outlined below:

Investment process

Macro-economic analysis

This involves a regular review and evaluation of country specific regulatory environments, the general economic outlook and changing real estate and mortgage market conditions. Through our evaluations we establish preferences for markets, property types and financing structures that will meet acceptable risk parameters.

Property level analysis

As active investors in the commercial mortgage loan market, we are in regular contact with major bank-loan originators, brokers, property owners and borrowers and, in particular, the major real estate private equity investors in Europe.

The team is therefore well placed to keep up-to-date on developments in the commercial property markets of Western Europe.

We have easy access to further property expertise from M&G Real Estate, our property fund management  arm. We also access external sources such as valuers, market specialists or property brokers. These resources can provide valuable detailed analysis of property level fundamentals including location, competition, rental levels, trading history, strength of the sponsor and demand and supply characteristics.

Credit risk analysis

First we use tenancy schedules to prepare cash flow models of properties and resultant mortgages, to find ratios of loan-to-value and debt service coverage, throughout the loan term. The following factors all influence the subsequent rating which is recommended to a credit committee:

  • Debt yields
  • Sponsor financial strength
  • Financial covenants
  • Enforcement and control rights

We use stress-case financial scenarios to test the resiliency of the property and loan terms under difficult operating conditions. We then carry out a review of the country’s legal framework for workout / restructuring / bankruptcy and consider its impact on timeliness of repayment and cost, often with specialist external lawyers or advisors.

Finally, we undertake a review with M&G’s internal credit research teams on counterparty risk endemic to hedging arrangements, loan servicing and the provision of liquidity facilities or deposit functions.

Deal structuring and execution

The deal needs to fulfil the following criteria:

  • Safeguards against all the risks identified by the real estate finance team
  • Optimises risk and return objectives
  • Meets structural requirements of all M&G-affiliated lenders

Once these criteria are met, the investment moves to the credit committee with a document summarising its characteristics including key risk ratios, cash flows, senior verse junior split and security package. The committee then reviews the credit underwriting and assign internal M&G ratings.

Deal execution

Loan and intercreditor negotiations are finalised along with detailed due diligence including tax, property and legal so that funding can follow.

Credit committee

The credit committee reviews the credit underwriting and assigns internal M&G credit ratings.

The credit committee is typically made up of real estate credit specialists and representatives from our corporate, infrastructure or leveraged loans teams. These specialists provide wider credit-market perspective in analysing investments.

Asset management & loan performance monitoring

The real estate finance team have built and maintain asset management systems which reflect good industry practice in real estate and mortgage asset investment management.

These include reporting frameworks to monitor, amongst others, covenant compliance, net operating income, leasing, valuation, capital expenditure programmes, borrower accounts, sponsor and tenant financial information, potential changes in the competitive position of properties, counterparty risk and servicing standards.

Main metrics are reassessed and cash-flow models are refreshed on a quarterly basis. Ratings are reviewed at least quarterly.

Watch lists are used and any loans with a material risk of impairment are reported to an internal problem credit committee which includes senior fixed income professionals as well as workout specialists.

Loan performance reporting

Reporting includes quarterly investor update reports, plus annual audited and semi-annual unaudited financial statements and reports.

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