By Ben Barbanel, Head of Debt Finance at OakNorth Bank
Fund finance is set to play a crucial role in mitigating the effects of COVID-19 and enabling property investors to weather these unprecedented times and to potentially capitalise on the opportunities it brings. Fund finance solutions can bring considerable value to real estate funds. In this article, I will explore the important role the product plays and use some examples of the fund finance deals we’ve done at OakNorth Bank to illustrate.
Fund financings can range from vanilla subscription lines (or “capital call” facilities) and net asset value (“NAV”) facilities, to hybrids of these two or liquidity facilities. The ultimate objective of such facilities is to provide operational flexibility, liquidity or leverage to the fund’s management team.
Real estate funds have traditionally found it challenging to access finance as the underlying asset class is perceived to be illiquid to a funder. Leveraging the underlying assets requires in-depth knowledge and understanding of not only the fund but also its underlying real asset portfolio.
Over the last year however, driven by COVID, more funds are evaluating their funding structures and in particular, are looking to raise liquidity, support their underlying investments and increase the financial flexibility within the fund. This has led to an increase in demand for the different types of products mentioned earlier.
Properly structured fund finance solutions can allow funds to ensure timely redemption of their investors’ commitments without a rushed sell-off of underlying assets (perhaps at a marked discount). With sufficient critical mass, such a sell-off would undoubtedly have an adverse effect on the UK property market as a whole. Furthermore, a fund with a strong WIP can execute deals in a timely manner by making drawdowns from the facility while raising further capital.
A fund may need access to finance to further diversify the investment portfolio given shifting macro trends. A NAV facility can be used for such an opportunistic purpose especially as the investment period of the fund comes to a close. Such strategies would help ensure stock in the UK property market is relevant and holds value whilst also having the positive effect on job creation.
These are a couple of examples of why fund financing has become more relevant in the UK property market since the onset of COVID-19. The pandemic has further exacerbated the customary challenges for smaller real estate funds ranging from say £50-£200m to raise fund financing products, due to size and constraints mentioned above.
At OakNorth, we have supported a number of funds in their growth which in turn helps to bolster the UK property market. We completed a £25 million fund finance deal with ICG Longbow (LBOW), the London Stock Exchange-listed fund specialising in first mortgage property investment loans secured against UK commercial real estate. In September 2019, we completed a £20m transaction with RAW Mortgage Fund, a specialist fund providing buy-to-let property loans against residential real estate in the UK. In February this year, we increased the facility to £40m. Such transactions evidence our commitment to providing robust fund financing solutions to real estate funds and we look forward to growing this product.
While it has been an incredibly challenging year for the sector, the silver lining is that it is enabling fund finance to be recognised as a helpful contributor to liquidity management and a vital funding source for the property sector. The test for the sector’s new breed will be in making it through the next 12-24 months when many of the government stimulus measures such as the stamp duty holiday and mortgage holidays come to an end. The lenders that make it out the other side of this crisis will be immensely well-positioned for the next cycle and will have built up loan books alongside their loyal borrowers and advisors.