40 years of lending lessons

Read this article to understand:

• The unique insights into market cycles drawn from 40 years’ experience
• Why sponsor relationships and ESG integration are more crucial than ever
• The evolving dynamics of real estate debt, from technology to sector trends

1984. For many, it’s the title of George Orwell’s dystopian masterpiece. For us, it marks the beginning of our journey into commercial real estate lending under what was then the Norwich Union.

To put this longevity into perspective, most of our competitors only entered the real estate lending space in the mid-2000s or later, when such strategies were seen as innovative. By that time, we had already spent two decades navigating economic cycles and cultivating enduring relationships with borrowers and sponsors – foundations that have stood the test of time.

The world of real estate debt has evolved immensely since those early days. In 1987, when Adrian Poole (who is now origination director, real estate debt at Aviva Investors), joined the team, lending was an entirely different operation. Computers were non-existent on the desk, and technology was rudimentary. A single phone was shared between six people, while correspondence relied on a typing pool – a resource where letters were dictated, typed, and revised over several days before being posted to their recipients.

Today, such processes have been replaced by instantaneous communication and significantly more data-driven analysis, allowing us to assess opportunities with speed and precision that would have been unimaginable in the past. Yet, for all the advancements in technology, the depth and complexity of our work have only grown, with human insight and learned experience remaining integral to everything we do.

Gregor Bamert (GB), head of real estate debt at Aviva Investors, and Adrian Poole (AP) reflect on the lessons learned over four decades of lending. Together, they discuss the defining moments that shaped the market, from the global financial crisis (GFC) to COVID, and explore how the integration of ESG and technology continues to redefine the real estate debt landscape.

How has the real estate debt market transformed over the past 40 years? What key changes in the regulatory environment have shaped the industry?

AP: Fundamentally, the real estate debt market’s core principles remain largely the same. Lenders still evaluate transactions by focusing on the quality of the counterparty (or sponsor), the location and design of the property, and the tenants who generate the income that services debt payments. The basic process of offering credit for returns, with careful risk assessment, has not changed. However, there have been notable shifts in the market over the years.

The structure of leases has also transformed. Historically, leases spanned 10 to 15 years and included “privity”, meaning tenants remained liable for rent payments even after assigning their leases. This was abolished in 1996, reducing tenant liability. Today, leases are generally shorter, placing greater emphasis on asset fundamentals and sponsor quality to ensure stable income flow.

Finally, the lending landscape has become far more diverse. While UK and overseas banks previously dominated the market, today’s lenders include insurance companies, debt funds, and some private property companies. This expanded pool of capital providers has given borrowers more options and fundamentally changed how capital flows into the market. From our perspective, our fund sources are also more diverse with managed third-party capital deployed alongside Aviva’s capital that has enabled us to offer a wider range of funding solutions to sponsors.

GB: The interest rate environment has changed dramatically over the last four decades. In the early 1980s interest rates were around 15 per cent. They were cut multiple times in November 1984 alone, dropping to 9.5 per cent. This is in stark contrast to the post-GFC period, when – with rates near zero for years –debt was significantly more affordable. The recent reversal of this trend, with rates rising again, has surprised some people and forced a reassessment of loan serviceability and overall market fundamentals.

Another significant change is the emergence of new asset classes that were either marginal or non-existent 40 years ago (see Figure 1). Purpose-built student accommodation, which was not widely considered as an investable category, has now become a key part of the market. Similarly, build-to-rent residential properties have gained traction, reflecting the growing demand for professionally-managed rental housing.

Data centres have also evolved from niche properties to core components of the market, driven by increasing digital infrastructure needs. Life sciences properties, fuelled by growth in healthcare and biotechnology sectors, have become another essential asset class. These sectors were once considered fringe but are now indispensable, offering new opportunities for both lenders and investors.

What benefits have we gained by starting our real estate debt business earlier than competitors?

AP: The primary benefit is our stability. Since we began lending, we have had an unwavering commitment to the market and not missed a single year of providing new financing, despite navigating recessions, the GFC, and COVID. This consistency demonstrates to our borrowers and partners that we are a reliable ally through both good and challenging times. Our lending is supported by the type and variety of capital we manage – mostly different forms of insurance and pension capital– allowing a greater degree of stability than lenders focused on sources of capital which can ebb and flow significantly.

Having a 40-year track record provides more than just longevity– it demonstrates responsibility and partnership. It’s not just about lending money; it’s about how we work with borrowers during both favourable and difficult periods. The feedback we receive from our long-term clients, coupled with high levels of repeat business, is a testament to this approach.

Another advantage is the stability of our team. Many of our colleagues have firsthand experience navigating tough markets, such as the GFC, the dot-com crash, and other downturns. This depth of experience equips us to handle challenging situations effectively. Importantly, as we have worked with borrowers through difficult times, both sides recognise the importance of working together.

Our longstanding relationships with sponsors also give us an edge. These mutual partnerships, built over years, foster trust and collaboration. For instance, during COVID, our customers acted responsibly and worked closely with us because of these enduring relationships. Their actions reflect the strength of our partnerships and the shared commitment to doing the right thing.

GB: Having a long-term perspective through different phases of the real estate cycle is another significant benefit. Real estate is inherently cyclical, and our experience working through various market conditions has taught us the right approach to underwriting and lending (see Figure 2).

Our longer-term view means we’re prepared to lend through downturns, as we understand that not every loan will avoid turbulent periods. For example, while a three-year loan might be timed perfectly to avoid disruption, a 20-year loan will almost inevitably encounter some choppy waters. This long-dated investment approach, combined with our track record, helps us navigate these cycles effectively and strengthens our position in the market.

What were the defining moments or economic cycles that impacted real estate debt markets, and how did we navigate them?

AP: The GFC was undoubtedly the most significant event in my career. It not only caused widespread distress but also ushered in a much stricter regulatory environment across the lending market. It was a moment of reflection – an opportunity to analyse what worked and what didn’t, and to adjust our approach accordingly (see Figure 3). In contrast, COVID, while less prolonged, was a sharp and sudden shock that brought entirely different challenges. It overturned some fundamental assumptions. For instance, high-quality tenants on long leases – traditionally deemed low-risk – leveraged government protections to delay or avoid rent payments, which completely reshaped lenders conventional understanding of transaction risks.

What stood out during COVID was the importance of strong sponsors. Borrowers who used their liquidity to ensure the loans were performing, even when tenants withheld rent, were instrumental in delivering positive outcomes. Many worked closely with their tenants, offering support while maintaining cash flow. Coming out of the pandemic, we were proud to have achieved robust results, largely due to relationships with strong sponsors.

The shifting desirability of property sectors has also been a key theme. Early in my career, the market viewed sectors more homogeneously, but this has changed dramatically. The rise of online shopping has negatively impacted retail properties while driving demand for industrial and logistics spaces. Recently, we’ve seen retail stabilise while the office sector faces challenges. Occupiers today are far more discerning, prioritising high-quality, sustainable assets, which has polarised certain properties.

Reflecting on these trends, it’s clear that being discerning about the sponsors we partner with, the sectors we target, and the quality of the assets we finance has become more critical than ever.

GM: Both the GFC and COVID taught us that the unthinkable can – and does – happen. Before the GFC, few people seriously considered scenarios where major banks would become insolvent. Similarly, nobody expected a situation during COVID where tenants would simply stop paying rent, or that much of the world would be forbidden from physically going to work. These events underscored the need to prepare for extreme and unexpected disruptions, even if they seem highly improbable.

From a borrower’s perspective, having a partner like Aviva during COVID was invaluable. Our long-term mindset, coupled with financial stability, allowed us to work collaboratively with borrowers rather than scrambling for liquidity. That partnership-focused approach was critical in navigating the challenges of the pandemic, ensuring strong outcomes for both parties.

How have investor expectations and demands for real estate debt products evolved over time?

GB: The most significant change has been the diversification of the lender base, which has led to a broader range of investor expectations and strategies. Today, we see a wide spectrum of capital sources, each with different objectives. For instance, some investors adopt a long-term, income-focused approach, akin to annuity-style lending strategies. Others are driven by relative value, comparing real estate debt to other private debt instruments, which can include both investment-grade and sub-investment-grade strategies. Then there are those targeting higher returns, pursuing absolute return opportunities within the real estate debt market.

This variety of capital means there’s no single dominant type of investor demand. Instead, it creates opportunities to develop tailored solutions that align with both investor and borrower needs. For example, investors could use a multi-sector private debt fund, which focuses on shorter-dated, higher-yielding opportunities, in addition to more traditional approaches that cater to annuity-focused clients. This flexibility allows us to address a wide array of investor demands while maintaining a strong borrower offering.

AP: Expectations around speed of service have also evolved significantly. Compared to when I started, the emphasis on customer service has grown substantially. The ability to deliver fast, efficient service is now a critical differentiator among lenders, making it an essential part of meeting both investor and borrower needs.

How have we adapted our investment approach over the years?

AP: Focusing on commercial real estate debt in the UK, we’ve made key adjustments to align with the scale of capital we now deploy. One shift is toward larger lot sizes, which has changed how we originate business. Prior to the GFC we relied heavily on third-party intermediaries to source business, but we now engage in more balanced way including direct conversations with clients. This approach not only enhances efficiency but also strengthens relationships with key sponsors.

Our investment approach remains rooted in consistency. Most of our funds have maintained stable requirements over the years, and our reputation for delivering on promises continues to be a cornerstone of our strategy. However, in recent years, we’ve introduced greater flexibility, particularly with third-party client mandates. This includes offering tailored solutions, such as allowing partial or full loan repayments, adjusting loan durations to match borrowers’ investment horizons, and incorporating other bespoke features to meet specific needs.

By leveraging long-standing relationships with sponsors across the market, we’ve been able to pivot quickly into new areas of lending. Our established brand and reputation have allowed us to gain traction in these areas almost immediately.

GB: Technology has also played a transformative role in our investment approach. Today, we can conduct sophisticated data analysis that was unimaginable in the past. For instance, we can analyse tenancy schedules, aggregate data across portfolios, and access detailed information about properties we’ve previously financed. If we’re considering a new loan, we can now instantly assess nearby assets we’ve financed, including details such as property value, use, and performance. This ability to integrate and analyse historical data provides us with a significant competitive edge.

Moreover, technology has made it easier to manage larger, more complex portfolios. The majority of our lending now involves portfolios of assets, which provide greater diversification. Technology enables us to process and analyse these portfolios quickly and efficiently, allowing us to maintain the fundamentals of a well-diversified portfolio while tackling more intricate and sizable deals than in the past.

How has the integration of ESG considerations in RE debt investments changed?

GB: ESG considerations have steadily grown in importance over the years. Early on, aspects like EPC (Energy Performance Certificate) ratings were already being captured, but the emphasis was far less integrated. The real shift has come from the long-dated nature of our lending. If you’re making a short-term loan, the environment when the loan is repaid is likely to be similar to today’s.

However, for a 20-year loan, you must consider a much wider range of things that could impact on the value and ongoing viability of the asset. Ignoring sustainability in such cases would be a questionable investment decision. That’s why ESG is now a fully integrated part of our underwriting process and why we launched our Sustainable Transition Loan Framework back in 2020 that has enabled over £1bn of sustainability-linked loans since.

AP: Historically, ESG wasn’t even a consideration for lenders. Over time, it evolved into a criterion for exclusion – transactions might have been rejected for failing to meet certain ESG standards.

Today, it has become a much more proactive and collaborative part of our process. ESG considerations are integral not just to how we analyse transactions but also to how we engage with clients and sponsors. We now actively work with borrowers to incentivise sustainable practices and future-proof assets to mitigate future risk. This evolution has taken ESG from being an afterthought to a reason for exclusion, and finally, to a key driver of how we enhance and structure deals.

Reflecting on the past 40 years, what key lessons have we learned?

AP: The first and most important lesson is that the sponsor is key. In the past, transactions often focused primarily on the quality of the asset or the strength of the tenant – for example, investment-grade tenants on long leases. The sponsor's role was sometimes considered secondary. However, with shorter lease terms, growing ESG requirements, and the need for collaboration with occupational tenants, the sponsor has become central to risk assessment. Selecting and working with the right sponsors, particularly through downturns, is now critical.

The second key lesson is that "nothing is forever." Markets evolve, and what may seem stable today can change significantly over time. For example, at one point, increasing lending to retail property seemed prudent, but the sector has since undergone profound transformation. Similarly, ultra-low interest rates couldn’t last forever, and market conditions shifted very quickly in response to the hiking cycle. Anticipating and planning for change, particularly by contemplating downside scenarios, has become an essential part of structuring transactions that benefit both lender and sponsor.

Third, macro factors often outweigh micro factors. Understanding where we are in the economic cycle, the direction of specific sectors, and the broader influences shaping markets often makes or breaks a deal. Focusing solely on individual assets or lower-level detail without considering macroeconomic trends can lead to missed opportunities or heightened risks.

GB: Diversification is another critical takeaway. Building a portfolio with a spread of tenancies, borrowers, and sectors significantly strengthens overall risk management. Diversification isn’t just about mitigating risk; it’s also about creating resilience across a range of market conditions.

Negotiation strategy is another area where we’ve learned to prioritise. It’s vital to focus on the key factors that matter most to both parties rather than trying to win every point. A pragmatic approach to negotiation helps foster stronger relationships and more effective outcomes for both lenders and borrowers.

Lastly, embracing and preparing for emerging issues is crucial. Changes in the market often arrive faster than expected. Being proactive and adaptive to new challenges – whether regulatory shifts, technological advancements, or changing client demands – ensures we remain ahead of the curve.