Non-listed real estate debt looks set to top investor allocations for the next two years as a route into the European real estate market, according to the Investment Intentions Survey 2023, published by industry bodies INREV, ANREV and PREA.
The report highlighted that 62 percent of respondents plan to increase their allocations in the non-listed real estate debt segment, with no respondents expecting to decrease allocations in the next two years.
The research also demonstrated that the second most expected entry point into European real estate investment is joint ventures, with 48 percent of respondents reporting that they planned to increase allocations to this investment route.
Pension funds and insurance companies were the biggest sources of capital for European non-listed real estate debt funds, raising €4.5 billion and €4.9 billion of capital, respectively, in 2022. Moreover, insurance companies are not only increasing their allocations to debt vehicles, but they are also acting as direct lenders themselves.
“When weighted by investors’ real estate assets under management, the net increase in allocations to non-listed real estate debt are even higher (79 percent), while non-listed real estate funds and joint ventures move into net negative territory with -16 percent and -6 percent, respectively,” per the report.
Despite investor size, the one constant was that non-listed real estate debt features as the preferred vehicle for investors – supporting the conclusion that investors are looking for lower-risk strategies, with senior debt well placed to serve that need.
“Senior debt, for example, offers superior returns, which compensate well for the relative illiquidity, as well as offers at least some inflation hedge and no additional risk,” the report authors explained.
Since the global financial crisis, alternative lenders have been growing their market share in the real estate debt market in comparison to traditional lenders, the report explained.
“The latest INREV Debt Vehicles Universe report not only reveals that these funds have reached their greatest extent yet – 98 vehicles with target equity totalling €60.3 billion – but also that this figure has doubled over the last seven years,” INREV wrote.
The total capital raised for all European non-listed real estate debt in 2021 was reported at a record high of €12.2 billion, according to the ANREV/INREV/NCREIF Capital Raising 2022 report, published on 20 April 2022.
The majority of the capital came from sophisticated institutional investors, mainly pension funds and insurance companies.
INREV explained that although non-listed debt vehicles are the most popular vehicle for investors in 2023, non-listed real estate equity funds will remain the most important vehicle in investors’ current portfolio.