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Grosvenor, the Duke of Westminster's property company, is launching a £900m lending business focused on residential development, as property investors choose debt investments over the risk of buying assets with fragile valuations.
The group, which owns large swathes of London's Mayfair and Belgravia areas, wants to expand its investments to include different types of residential properties across the country, including homes for sale as well as rental, student and retirement accommodation.
Grosvenor said the money for the lending business would come from “organic growth” and “strategic sales around the world”. [London] Property”.
The company's move towards lending comes at a time when many real estate investors find debt to be a more attractive way to invest money in real estate, compared to purchasing assets directly or developing themselves.
Some investors were hesitant to buy the assets for fear that their prices would fall further as interest rates rose, destroying real estate values. Higher debt costs have made such lending more profitable.
However, Grosvenor's foray into lending brings with it significant risks. Many lenders eschew development financing in favor of debt secured on existing buildings, which can be sold to recover funds in the event of default. Lending to support construction is riskier.
Rachel Dickie, chief investment officer at Grosvenor, said there was “no shortage of equity or debt that wants the end product” in residential property. “I think that's the part about development that worries people,” she added.
Dickie said that because Grosvenor was already a commercial developer, financing the construction was “already within our risk appetite” and the company could easily “take a view on pricing that risk”. It added that it is also better placed to take over construction sites in the event of a default.
Grosvenor began the debt process a year ago with an initial £120m and has now expanded the commitment to £900m over the next decade. To date, its loans have financed 1,800 homes.
It has financed projects including 316 homes to rent in Bath and a syndicated loan with Generali Insurance Group to purchase 65 homes for sale in Canary Wharf.
The decision to add lending to Grosvenor's sprawling interests – which include rural property, agriculture and overseas properties – is part of a strategy to diversify beyond the large London estates and boost the group's income. The group's North American arm already has an established debt business.
The aristocratic Grosvenor family has owned estates in London for more than 300 years. Dickie said the company aims to allocate 15 per cent of its capital outside London real estate – up from around 7 per cent currently – but to generate a quarter of its income from those investments.
Despite its prestige and high value, luxury properties in London generate less income than riskier projects and assets. Grosvenor has also consolidated its investments in international real estate with other asset managers.
