Debt to a play bigger part in next stage of the cycle, says Colliers survey

The equity phase of the real estate cycle is giving way to one driven by debt, suggest responses to a Colliers International survey on the global property market.

Colliers’ survey showed that more investors intend to use debt during 2016 as they strive to hit more ambitious return targets, despite adopting more risk-averse investment strategies. In total, 82 percent of respondents said that they were “likely” or “highly likely” to use debt in future investments, up from 78 percent last year.

The change was more significant in Europe, where 83 percent of EMEA-domiciled investors say they are likely to use debt over the next 12 months, up from 71 percent last year. The report noted a split in the intentions to use debt between continental Europe (90 percent) and the UK (75 percent) reflecting tighter pricing in the UK market. Nearly half of UK investors surveyed think the cost of debt will increase in the next 12 months.

The consultancy surveyed more than 600 investors across the risk spectrum for its Global Investment Outlook report. Respondents were based across the EMEA region as well as the Americas and Asia-Pacific and included private equity firms, property companies, REITs, funds and sovereign wealth funds with a collective $1.5 trillion under management.

The report found that the global appetite for real estate investment is up. More than half of respondents with multi-asset portfolios said that they would increase their real estate allocations in the next 12 months, with the US a preferred destination for capital. During the first nine months of 2015, transactional activity hit $625 billion, up 11 percent from last year.

However, risk appetite has moderated, with 44 percent of respondents saying they are either “likely” or “highly likely” to take on more risk, down from 59 percent in last year’s survey. Conversely, the survey found that 69 percent of global investors are seeking returns in excess of 11 percent, up from 59 percent of investors last year. Colliers suggested that these higher return targets would be met through a greater use of debt.

In the EMEA region, 57 percent of investors polled plan to be net buyers in 2016, although only 49 percent said that they would take on more risk, down from 58 percent in last year’s survey. More than two-thirds of EMEA investors said they are seeking leveraged IRR returns of between 6 and 15 percent in 2016, which Colliers described as “modestly aggressive” in comparison to last year.

US investors did not appear to be overly concerned by interest rate increases – since the report was collated the US Federal Reserve has increased its rate by 0.25 per cent. In total, 73 percent of US respondents think that the cost of debt will increase in the next 12 months, one of the highest shares globally. However, a majority (54 percent) think underwriting standards will not vary substantially.

Despite the prospective increase in the cost of debt, 87 percent of US investors are highly likely or likely to use debt in the next 12 months, unchanged on last year. US investors are also willing to take on higher levels of leverage, with 56 percent expecting to use leverage of 51 to 75 percent compared to only 38 percent globally in that same range.

In Asia-Pacific, the survey found that 91 percent of investors are likely to use debt, up from 71 percent last year. The primary source of debt (85 percent) will be from banks, respondents expect.

“We have seen a fundamental reshaping of property debt over the last five years and what has emerged is a more stable environment and a greater number of participants sharing risk,” said Madeleine McDougall, head of institutional clients at Lloyds Bank Commercial Real Estate and chairman of CREFC Europe, commenting on the report.

“Increased appetite for real estate is understandable given its historic outperformance of other asset types. Debt will continue to play a crucial role over the next few years, particularly in the financing of new developments which has fallen behind demand,” McDougall added.