For real estate investors, ‘credit is really resonating’

However, some institutions believe equity deals still are more attractive than debt investments in multiple respects.

If one was to ask a real estate investor where to put their last dollar in the current market environment, the chances are the answer would be in credit.

“It’s a pretty compelling argument as to why you should go to private credit versus everything else you’re looking at on the equity side,” said Jay Kwan, head of Europe at QuadReal, speaking at the opening panel on the first day of the 2023 PERE Europe Forum at Glaziers Hall in London.

Kwan suggested a hypothetical equity investment could be a value-add deal that could generate a 13 percent internal rate of return based on 50 percent leverage. By contrast, “I could do mezzanine financing, make that same 13 percent and I just need to know that my last dollar won’t be lost unless yields blow out beyond 6.5 percent. And then the money goes out for three years, four years, comes back and then the equity markets may give more clarity by that point.”

He added that more debt is coming due in the next five years than the five years after the global financial crisis. And although leverage points are lower, interest coverage ratios and loan-to-value ratios are still at “pretty unhealthy” levels.

PERE Europe Jay Kwan QuadReal
Kwan: considers real estate debt to be “much more compelling” than real estate equity

“So I think it’s a compelling argument why one should at least consider positioning yourself for the better opportunity in the next couple of years,” Kwan said. “Even if it doesn’t come, I think from a risk-reward basis, it tells a much more compelling story.”

Stephane Jalbert, head of Europe and Asia-Pacific real estate investments at Canadian pension plan PSP Investments, shared similarly positive views on debt during an afternoon panel on day 1 of the conference. “The best risk-adjusted [return] if you price something right now is probably in the debt space,” said Jalbert, whose organization has an equity-only real estate mandate.

“If you’re a long term investor and you want to take that position of acquiring an asset and carrying it for a couple of years under your cost of funds, this is because it makes sense to your portfolio and you strongly believe in the pricing power of your asset.”

Karim Habra, head of Europe and Asia-Pacific at fellow Canadian investor Ivanhoé Cambridge, agreed that debt deals are “probably” more attractive than equity deals, but from an IRR standpoint.

PERE Europe Karim Habra
Habra: debt investments can be less attractive than equity in a number of respects

However, that was not the case from an equity multiple perspective, he pointed out: “We forget this, but debt investments are low equity multiples. And typically with debt investments, your returns are capped. You’ll never do better than your underwriting.”

By contrast, “on equity, you never know,” Habra continued. “You can have good surprises as well, which is the beauty of an equity deal.”