NBAD is preparing to launch a fund that will offer high-interest loans to European property companies.
National Bank Abu Dhabi plans Europe property fund
The National Bank of Abu Dhabi (NBAD) is preparing to launch a fund with a European partner that will offer high-interest loans to European property companies that are struggling to secure funding because of the global squeeze on credit. NBAD and Evans Randall, a British investment bank and private equity group, will initially invest about US$20 million (Dh73.4m) of their own capital to seed the new European Real Estate Mezzanine Opportunity Fund, said Shiraz Habib, the head of product development at NBAD's investment banking group.
The fund would sell 80 per cent of its initial capital to investors, Mr Habib said. He said it would make loans to property investors primarily in the UK and Germany and other markets in the continent. NBAD, the Emirates' second-largest bank by assets, plans to raise as much as $500m by next year from Gulf institutional investors and individuals. Mr Habib said the fund's focus on investing in mature economies, with less volatility than emerging markets, would help diversify the bank's investments.
"There are always more rewards in volatile markets but the risk is also higher," he said. "We are going into markets where we feel there has been enough correction." Investors are returning to the UK property market to capitalise on attractive valuations, after house prices fell 15 per cent in the past year, according to figures from the home lender Halifax. Commercial property values have also fallen sharply, but many lenders are reluctant to increase their exposure to what is still perceived as a risky asset class.
The funding gap has increased demand for so-called mezzanine finance, halfway between debt and equity, which provides quick finance to property investors who cannot met their capital needs through conventional bank loans. Mezzanine lenders often charge interest at more than double the rate of conventional products because of the higher risk profile of the loan. Before the credit crunch, investors had little difficulty sourcing highly leveraged funds to finance the construction of property developments.
"Now is a reasonable time to enter into mezzanine financing but that doesn't mean you should not be prudent," said Giorgio Questa, a professor at Cass Business School, part of City University in London. "If they do it with the right people and right knowledge it could be a profitable business." Gulf banks should try to tap new revenue streams overseas to compensate for declining levels of activity at home, according to Deepak Tolani, a banking analyst at Al Mal Capital.