Q1: Your recent report on Real Estate Credit Investments sits behind a disclaimer. What can you tell us about that?
A1: It is just the standard disclaimer that many investment companies have. In essence, for regulatory reasons, there are some countries (like the US) where the report should not be read. It is not a simple asset class, and the report should only be looked at by professional/qualified investors.
Q2:Your recent report was called Vive la difference. What can you tell us about it?
A2: In this note, we analysed RECI’s French exposures, which now account for 37% of commitments and three of the top-10 commitments. In particular, we reviewed the geographical and sector risk diversification, and growth opportunity benefits, that this brings to RECI investors.
We looked at the competitive advantages of Cheyne, the manager, in this area, noting, particularly, its structuring of complex deals, certainty of finance and relative simplicity compared with syndicate providers. We used case studies from its €1bn+ cumulative lending to illustrate these advantages.
We also looked at RECI’s recent quarterly update, which highlighted its usual, overall strategic theme of consistency.
Q3: So, looking at RECI in France, can you give us some background first?
A3: While the nature of lending is somewhat lumpy, there has been a consistent trend of growth over several years. We have a chart in our note that shows the growth since January 2018, when French assets were just 8% of the book, to the current level of just over a third. It is not an accident but a deliberate, planned, directional transition of the book away from the UK (which, at the start of 2018, was 81% of lending, and is now just a half) and into Europe, especially France.
Q4: What benefits does that bring to their investors?
A4: Real Estate Credit Investments’ exposure to France brings investors geographical diversification, which is important for risk management, and exposure to COVID-19 restrictions and interest rate moves. It also leads to greater sector diversification and a different (lower risk/return) investment profile. By way of example of the lower risk profile, even though hotels are a major sector exposure in France, the performance through COVID-19 was exemplary. It also provides new growth options should the UK slow.
Q5: You said you looked at Cheyne, the manager’s, strengths in France. What can you tell us about these strengths?
A5: Cheyne has been lending in France since 2017. Initially, this was conducted out of the London office, with the French team, headed by Raphael Smadja, making the commitment of regular visits (pre-pandemic) to meet key network partners, such as developers, brokers and banks, face to face. From 2018 through to spring 2021, when a Paris Office was opened, this model generated €750m. This has now grown to gross cumulative lending in excess of €1bn.
In France, Cheyne adopts the same lending practices we have outlined in our previous notes, using experienced staff, who own the exposures and are directly responsible for managing situations that may go wrong. The combination of experience and culture is hugely important in assessing risks, monitoring exposure post onboarding and managing situations that may become adverse.
In terms of origination, Cheyne’s core competency in structuring deals, its speed to completion and its certainty in finance give it a clear competitive advantage that is not dependent on taking risk, and we outline, in our report, some case studies of how this has delivered in practice.
Q6: A few words on the French property market?
A6: Our property analyst went into some detail in the report on the outlook for both commercial and residential property. If I were to limit this to a few words, my summary would be that the markets look robust – indeed, probably among the strongest in Europe. We concur with Cheyne’s view that the downside risk in the market appears relatively modest.