KKR has launched its real estate credit business in Europe, with an eye toward originating $1 billion to $2 billion in loans in the region next year, PERE has learned.
“It’s a super-interesting time to be building a real estate credit business,” said Matt Salem, head of real estate credit at the New York-based mega-manager. “The world has gotten obviously much more volatile. We’ve seen a lot of repricing on the equity side of the industry, there’s uncertainty around cap rates, there’s uncertainty around valuations. And there’s a strong view that credit and real estate credit as well offers a lot of relative value right now.”
The platform will be led by Ali Imraan, who joined in January as head of European real estate credit and previously was managing director of debt investments and special situations at Chicago-based manager LaSalle Investment Management. Rounding out the London-based team are principal Saurav Chakraborti, formerly an executive director at Goldman Sachs; principal Francesco Cariati, previously an executive director at Morgan Stanley Investment Management; and associate Antonio Guerra, previously an associate at Deutsche Bank. All three executives joined in June or July of this year.
KKR will invest across the real estate capital stack, including whole loans, mezzanine and construction financing. “That breadth of capital makes us very relevant in a market like this. We have the different forms of capital in terms of permanent capital and drawdown capital, so the flexibility is great. The opportunity to build something here is absolutely huge.”
The firm is nearing the completion of its first real estate debt deal in Europe and targeting $1 billion to $2 billion of annual originations in the region next year, focusing on an average loan size of $150 million, according to Salem. “Next year will be an interesting year to invest,” he remarked. However, he points out the $1 billion to $2 billion origination target is only for next year and expects transaction volume to scale up by multiples over time.
The ability to originate loans in the $100 million to $150 million range – where “liquidity really dries up” – is one of the differentiators for the business, Imraan noted. Another differentiator is being able to approach deals from an investor perspective. “A lot of the borrowers we lend to, they’re doing transitional business plans, and they want somebody who can understand their business plans, and we underwrite to the business plan.”
The business will focus on the core markets of the UK, Germany, Netherlands, France and Spain, as well as the Nordics and Ireland, and property sectors with strong income growth, particularly industrial and residential.
The opportunity set in European real estate debt has become much more broad-based as non-bank lenders have become more widely accepted, Imraan noted. “Historically, Europe had been a very bank-dominated market,” he said. “Now, you have a multitude of people you can go to, and I think that’s the maturity of people being here, lending through different funds, and raising capital and growing.”
Although banks were already pulling back for regulatory reasons, they stand to further retrench in terms of geographies, sectors and risk-return profiles amid the current market dislocation. “That will leave a much bigger pool for non-bank lenders to tackle,” Imraan said.
The buildout of the European real estate credit business comes seven years after KKR launched its real estate debt platform with the team lift out of a dozen debt professionals, including Salem, from Rialto Capital Management. Since then, the firm has formed and listed a public mortgage real estate investment trust called KKR Real Estate Finance Trust and raised a private real estate debt fund series, Real Estate Credit Opportunity Partners and Real Estate Credit Opportunity Partners II.
Both of these strategies are focused on transitional lending. Additionally, KKR also does lower-risk, lower-return real estate lending through its 60 percent ownership of Global Atlantic. All of these capital pools offer optionality to invest in Europe.
“We have scaled capital that can all effectively export to Europe,” Salem explained. “So, the idea is that Ali and his team can offer the same type of products, fixed, floating, all the way from core to more opportunistic lending across the client base in Europe.”
Today, KKR has 67 people in real estate credit, including the four-person European team led by Imraan, and approximately $30 billion of assets under management. Current market conditions have created “a much more lender friendly market than where we were a year ago,” said Salem. Whereas historically KKR has originated real estate debt at a loan-to-value of 65 percent to 70 percent, that LTV is now in the 60 percent to 65 percent range. Meanwhile, credit spreads are out 100 or so basis points from a year ago, he added: “Our capital is just much more needed. And so we’re able to take advantage of that on multiple fronts in terms of how we’re making these loans, whether it’s leverage or covenants or pricing.”
In both the US and Europe, KKR has “reverted to the absolute safest opportunities,” characterized by investments with strong growth, tenant demand and supply-demand dynamics. “Because number one, you want more safety in a market like this,” Salem explained. “Number two, you’re getting really good returns right now. And you can do that on the simplest business plans, or the highest-quality property types.”
With its European real estate credit business, the firm will also typically target higher-quality borrowers and assets. “And then obviously we want to be big in size because we want to scale the business so that naturally tends you towards a group of clients that are very much like us, so the big institutional private equity funds, the big institutional asset managers of real estate,” Imraan said.
Given the volatility and dearth of financing in the market today, “this is much less of a hunting market, it’s much more of an evaluation market,” Salem noted. “The opportunities are abundant. And so just making sure we’re spending our time and resources on the most actionable opportunities is really the name of the game right now. There’s a such a need for our type of capital right now that we really can pick our spots.”
Access to different types of capital will be “what decides the winners and the losers” in the real estate debt space, said Imraan. “If you work across the capital stack, you can always look and pivot to where you think the best reward opportunities are. And also, you’re way more relevant to your borrowers. So, I think that is a big differentiator.”
Scale is another point of distinction, he added: “If you look at it from a borrower’s perspective, if you can go to somebody who has different pools of capital and can scale with you, that’s super attractive and that’s a relationship that’s worth having. I think all these things will play in our favor.”
KKR managed $61 billion in real estate assets as of June 30, of which roughly half was in real estate credit, according to the firm’s real assets overview in September.