Colliers: RE debt fund managers have $61bn of dry powder

Global investors are targeting debt as well as opportunistic and value-add investing, the consultancy says.

Debt is among the most popular real estate strategies pursued by global investors, coming in behind opportunistic and value-add investing, according to new research by Colliers International unveiled at the MIPIM conference in Cannes.

The consultancy said there is around $61 billion of capital in closed-ended real estate debt funds yet to be deployed globally, with the figure likely to rise as new debt funds are established.

However, with $135 billion of capital raised, opportunistic investment was cited as the most favoured strategy, followed by value-add, with $83 billion.

The research, which polled 12 mid- to large-scale global investors from a range of domiciles, showed two-thirds have existing debt funds or vehicles with the majority focused on European, Australian and Asia-Pacific investing.

“There is an increasing shift towards debt globally following strong fundraising since 2017,” said Damian Harrington, head of EMEA research, Colliers International. “Real estate debt investment offers institutional investors further diversification, stable long-term income and the ability to deploy significant tranches of capital into the market, particularly when stapled to large lot size transactions.”

Harrington added that the restricted development pipeline creates an opportunity for debt providers. “From our analysis, the UK office market is of specific interest to investors, driven by the scale of the market and the current lack of traditional debt funding sources,” he added.

However, in the UK, lending to commercial real estate remains a fraction of 2007 levels. Net bank lending to commercial property amounted to £27.1 billion (€31.5 billion) in the year to the end of Q2 2007, with the banks’ exposure standing at 11.3 percent of all commercial lending. In the year to Q4 2018, however, net lending was £4.4 billion, with bank exposure at 6.2 percent.

“Bank debt is still not a significant component of the UK property market, despite signs of improvement over the last quarters of 2018,” added Walter Boettcher, chief economist at Colliers. Limited lending has resulted in a shortage of grade A space across all asset classes, with the UK market “profoundly unleveraged”, Boettcher continued.

“From a market stability point of view, a surge of distressed sales on the back of some economic downturn looks very unlikely. Highly leveraged, opportunistic buyers targeting double-digit returns, will have a tough time finding distressed assets to buy at a discount. What is likely to remain is long-term investors with moderate return requirements that are equity driven and not as reliant on debt,” he added.