DRC explores the whole loan market with £700m fund

With a final close on its hard-cap of £700 million ($909 million; €788.4 million) – surpassing its initial target size by £200 million – DRC Capital’s latest real estate debt fund highlights investor appetite for whole loan strategies.

The DRC UK Whole Loan Fund – which had a first close on just under £250 million last December and reached final close under 10 months from launch – provides loans to UK borrowers of up to 70 percent, with full control over underlying assets through first-ranking mortgage security.

The discretionary capital for the strategy was raised mainly from public and private pension schemes based in the UK.

“The fund raise is reflective of investors’ continued desire to take advantage of the positive spread differential over similar types of credit assets,” Dale Lattanzio, managing partner for DRC Capital, said.

He told PERE’s sister title Real Estate Capital the vehicle is the first in a series of whole loan-focused products that complement the firm’s range of senior and high yield vehicles. “Some investors don’t want to be in high yield, so we are adding a new strategy between senior and high yield; this is one step down the risk spectrum,” he explained.

The target return for investors is around 7 percent and the fund is already 50 percent deployed, Lattanzio added. DRC expects to deploy a significant portion of the fund’s capital by the end of 2018.

So far, DRC’s UK whole loan fund has created a diversified portfolio of unlevered whole loan investments in London and major regional locations across the UK, focusing on value-add, income-creating properties, the firm said.

Non-bank providers of real estate debt have recently told Real Estate Capital of the growing opportunity to provide whole loans.

“In the last few months, we have seen a lot of investor interest in whole loans,” one UK-based debt fund manager told Real Estate Capital during this month’s EXPO Real event in Munich, adding such loans can suit situations where borrowers require capital to support business plans with a value-add element, as well as for stabilised, cashflow-producing properties where sponsors are seeking leverage of as much as 75 percent.

Whole loan lending, the debt fund manager added, allows lenders to invest capital lower down the risk curve than traditional high-yield debt strategies, while also deploying in scale.

Another debt fund manager, Lorcain Egan, Starwood’s head of lending in Europe, told Real Estate Capital in August the firm has recently shifted the focus of its lending mandate to whole loans, due to a “better” risk-adjusted return compared with mezzanine financing. While Starwood targets mezzanine positions priced above mid-700 basis points all-in cost to meet return requirements for investors, the market for mezzanine financing offered margins in the high 500s to low 700s bps range, Egan noted at the time.