Updated: Oct 2, 2018
In our monthly Coffee Chat we feature important updates and musings of this month.
Growth Market: Private Debt for Real Estate Financings
Our observations in the market confirm the trend in growth of private debt funds of enclosed article : 324 players were raising $ 153 billion last year, of which one third were raised by newcomers to the market. Why is that?
Banks becoming restrictive
Given realities around Basel III and the issued regulations of Basel IV, commercial banks have been facing scrutiny in the usage of funds and capital . Once the driving force in the mortgage market, commercial banks are being diluted by Internet providers and alternative financing firms and family offices. As to former, statistics in Germany show that already one third of retail mortgages are being issued by Internet providers…trend growing in the coming years. For larger real estate transactions, private debt funds and family offices have discovered this market, offering Mezzanine financings and Credit Linked Notes in the Loan-to – Value space of 50%+. Our observations as service provider in latter space confirm this growing trend. But of course, like with all real estate opportunities, its location, location, location: quality of product, tenant rent roll with WALT of at least 5 years+, central location embedded in strong infra structure and attractive annual yields.
Investor appetite for higher yield
We have enjoyed low interest rate environments for quite some time now, at least here in Europe. That is good news for growth engines relying on attractive funding. For investors , however, that has been more than unattractive. While the general public has been focusing on seeking higher returns in countless mutual funds in the capital markets, sophisticated money is looking for private debt and equity as an attractive alternative. We can observe a growing demand by family offices and sophisticated institutional investors to invest in this market.Its combination with real estate as an underlying security, is an additional attraction for European investors, seeking “tangible” security over balance sheets and quarterly reports.
Real estate as a valid asset class: from “Alternative” to “Core”
In the traditional hallways of Portfolio Theory, real estate has been labeled “Alternative” together with private equity, debt and hedge funds. As the sophistication of investors and providers has been increasing, however, over the last decade, we are observing a trend towards moving real estate more and more into the “Core” category. New and improved evaluation techniques, deeper research on empirical closings, lesser fall out rates and continued attractive annual yields make it so. The inborne negative correlation features of real estate versus capital markets still hold true and will assure further growth in this asset class for years to come.