Opportunities in European mortgages are emerging, with pension funds beginning to fill the funding gap left by European banks in the aftermath of the global financial crisis, estimated by McKinsey & Co. to reach €3.4 trillion ($4 trillion) by 2019.
Now that banks have tightened up on issuing residential mortgages as a result of capital requirements imposed by Basel III regulation, the market has opened to new players, including money managers.
And investors are finding a variety of ways to access this market, largely through direct funding of non-bank mortgage companies and investing in covered bonds. Some new vehicles are arriving on the radar of institutional investors, who have been eager to find new fixed-income investments after quantitative easing pinched bond yields.
Such strategies have allowed asset owners in the Netherlands, in particular, to invest directly in residential mortgages in the past few years through pooled funds provided by investment management companies such as Dutch Mortgage Funding Co. More recently, in November, Stabelo AB, Stockholm launched a similar vehicle to lure Swedish institutional investors.
Taking note of booming residential markets in Europe as well as these new players, asset owners are taking mortgage-type strategies more seriously, sources said. In addition, money managers report increased investor appetite for mortgage-backed derivative investments, such as the covered bonds that banks use to fund their mortgage programs.
Asset owners could realize an annualized return of around 2.7% investing in mortgage loans pooled by companies such as Dutch Mortgage, according to Marieke Hut, director at Dutch Mortgage Funding in Amsterdam. That compares with the annualized 1.02% return on covered bonds that investors could earn in the past three years, according to the Markit Iboxx covered bond benchmark. Yield offered by these covered bonds stood at 0.47%, while similarly rated 5-year Dutch government bonds had negative yield of 0.14%.