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Investment Trust Insider on Starwood European Real Estate Finance

28
2018
March

Investment Trust Insider on Starwood European Real Estate Finance

James Carthew: Starwood loan fund shines after slow start

Starwood European Real Estate Finance (SWEF) celebrated its fifth birthday in December. As the name suggests, it invests in debt secured against property in the EU. Its loans typically range between three and seven years with the average currently at the low end of that spectrum.

The £388 million investment company holds a mixture of first lien and whole loans, subordinated and mezzanine loans. It can lend against new developments but only up to a quarter of net assets as because the of the higher risks involved. It also aims for a maximum blended loan-to-value ratio of 75% (ie, three parts debt to one part equity) but is willing to go up to 85% on some individual loans.

The fund launched on the London stock market at the end of 2012, raising £228.5 million. Its target was to deliver annual returns of 8% to 9% per annum, paying a yield of 7% on the issue price once fully invested. In the event, it took a bit longer to get invested and returns have been a little below targets.

The reason is perhaps obvious: interest rates were declining before the flotation and continued to fall afterwards. The yield on the S&P UK investment grade corporate bond index fell from over 4% in the summer of 2012 to around 3.5% at the end of that year, hitting a low close to 2% after the 2016 EU referendum. Rather than achieve the return target by compromising on quality, SWEF lowered its dividend. The weighted average return on its portfolio at the end of last year was…

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