As we approach the end of the property cycle, seeking exposure to real estate via the debt route seems a no-brainer due to its defensive nature.
Indeed, property debt was cited last week as one of the market’s best investment picks by JLL’s global head of funds advisory, Matilde Attolico, during a panel discussion at the firm’s UK market predictions event. Another panellist, Mike Sales, chief executive of Nuveen Real Estate – formerly TH Real Estate – added that property debt is a “great place to hide out” for the next three years.
The sharp drop in European real estate debt fundraising volumes during 2018 – down 46 percent to $5.74 billion – corresponding with a drop in global figures, seems therefore counterintuitive. Has real estate debt lost momentum among investors?
According to industry players canvassed by Real Estate Capital, interest in the asset class is actually holding up. Further survey findings by INREV show 22 percent of global institutional investors are expecting to increase allocations to property debt over the next two years, in line with sentiment in 2017, when fundraising levels hit a record $10.6 billion.
When looking at fundraising data for the last four years, a clear pattern emerges. Although new entrants have set up shop in the debt space, Europe’s non-bank real estate debt fund market remains dominated by relatively few organisations with established track records. Fundraising figures reflect those firms are going through their fundraising cycle – one year they raise capital, the following year they deploy it. After a bumper year of fundraising in 2017, a slower year in 2018 is not surprising.
It shows how private real estate debt in Europe is a relatively young market, only really emerging after the financial crisis. The asset class is gathering strength, though. New entrants, including Amundi and BNP Paribas Asset Management, which are undertaking their first round of fundraising, will bring more liquidity. Consider also, not all capital is coming into the sector through funds. Some new entrants are lending directly, while others are handing lending mandates to more established firms.
The challenge for all fund managers is to deploy capital as the end of the cycle approaches. Despite active competition for the best assets, non-bank lenders are not expected to go up the risk curve too quickly. They are all concerned about making losses. A cautious approach is often cited by participants when asked about deployment in 2019. This encourages some to set modest fundraising targets in vehicles launched this year. The increasing difficulty in sourcing the right deals could also slow the speed to deploy cash already raised.
However, even if non-bank lenders do become more cautious, the investment thesis for the asset class will remain valid in the coming years. With traditional fixed income asset classes under pressure, investors seeking risk-adjusted returns will still find an appealing proposition in property lending – and managers are bound to want to capitalise on this.
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