The wall of private debt capital available globally for real estate investments reached new heights last week, thanks to the $8 billion final close of Blackstone’s latest real estate credit fund.
The largest-ever property debt vehicle, Blackstone Real Estate Debt Strategies IV, represents nearly half of the $16.5 billion year-to-date global fundraising total for real estate debt strategies, according to sister title PERE’s data. PERE defines debt funds as vehicles that focus on debt issuance rather than debt purchases.
Capital raised for real estate debt funds in 2020 is on track to exceed the $16.6 billion raised for full-year 2019. But the volume is still lower than the $29.1 billion raised in 2018 and the $43.3 billion raised in 2017.
Despite lower fundraising volumes in recent years, the amount of dry powder accumulated by real estate debt funds is nothing to sneeze at. As of March 2019, real estate debt fund managers had $61 billion of dry powder, according to Colliers International research, the most recent numbers available from the property services firm.
Commercial real estate debt issuance has held steady at just under $1 trillion over the past three years, reaching $970 billion in 2017, $993 billion in 2018 and $971 billion last year, according to PGIM Real Estate. However, the need for liquidity has only increased for real estate borrowers during the pandemic, including for areas not typically targeted by institutional capital.
As Peter Plaut, executive director of family office Wimmer Financial, said during the Private Debt Investor: New York Forum virtual conference last week, larger credit funds, private equity and family offices are typically focused on loans that are $100 million to over $1 billion. For Plaut, however, an area of opportunity was mortgage originations in the $20 million to $100 million range for small to mid-size developers that now face funding shortfalls as result of the covid-19 crisis.
Although the availability of credit has increased as lending sources re-enter the market, spreads are still wider than they were pre-covid and credit parameters remain relatively tight, according to a real estate market update from advisory firm Townsend Group.
Moreover, Chris Moyer, New York-based managing director at Cushman & Wakefield’s equity, debt and structured finance group, told us that with so much capital to deploy, real estate debt funds, CMBS lenders and insurers have become very aggressive in their bids, especially as many originators have year-end targets for debt issuances. Such competition has driven down yields to as low as 2 percent for CMBS and insurers, although debt funds are still trying to achieve unlevered pricing in the 4 percent coupon range, which is still at or below pre-covid levels, he said. This raises the question of whether debt funds currently in investment mode will be able to achieve their target returns, which are typically in the 6.5-7 percent range for an open-ended core real estate debt fund. The BREDS fund series has targeted a 9-11 percent net return.
But in a low interest rate environment, even lower than expected returns in real estate debt will be attractive to institutional investors as they seek relatively low-risk, non-fixed income alternatives. As mega-manager Brookfield Asset Management chief executive Bruce Flatt said during the firm’s second-quarter earnings call, “if you are trying to earn 5-8 percent within an institutional pool of money, there really is no hope to do that with traditional fixed income”. Instead, the pools of capital previously allocated to fixed income will shift to low-risk alternatives such as private credit, real estate and infrastructure.
So, while the wall of capital may drive down returns for real estate debt strategies, such a prospect does not present an insurmountable hurdle for many yield-hungry investors with limited alternative means to meet their liabilities.
This article first appeared in sister publication PERE