To those institutional investors that place their real estate debt investments apart from their other real estate holdings, the boss of one of private real estate’s biggest firms says: don’t.
“Where to place it?” Sonny Kalsi, co-founder and partner of GreenOak Real Estate, asked delegates at PERE’s Asia Summit in Hong Kong during the keynote address of the first day of the event on Tuesday. “I think real estate debt should be with the real estate team.”
“Equities too,” he added. “That should also be with the real estate team. Sometimes [investors] split them up.”
Keeping the focus mainly on real estate debt, Kalsi said: “From an institutional investor’s perspective, if they’re thinking about this as a proxy for fixed-income, the yields are bad.”
He pointed to 10-year US treasuries, which traded Tuesday at 2.7 percent, according to online monitor MarketWatch, against prime property yields of around 4 percent. “That leaves little space [for lenders],” Kalsi commented, though he admitted prime property yields looked competitive against corporate bonds, which trade at similar level.
He conceded: “It is a challenge for investors: where does this sit and where is the appropriate spread?”
The real estate debt fund space has proliferated as managers of lending products seek to fill a vacuum left by traditional lenders following the global financial crisis in 2008. “On one consultant visit I was told there were 52 new debt funds in Q1, 2018 alone,” Kalsi said, referring to the US market. “That’s a ton of money raised from all kinds of directions.”
But while some place their real estate debt strategies in a fixed-income bucket and their listed holdings in an equities bucket, Kalsi urged investors to group them together in order to take a holistic view on their real estate exposures.
Kalsi also advised investors to ensure whichever managers they choose to partner, there is appropriate real estate lending expertise there. “Make sure, if you invest in credit, the manager has credit guys on the team. It’s a sure-fire way to lose money if they only have a bunch of equity guys,” he said. “Equity guys always believe the glass is half-full nearly all of the time. That’s a bad way to be a lender.”
On a subsequent panel the same day, the notion of real estate equity specialists in lending capacities was revisited. François Trausch, chairman and chief executive of German insurer Allianz Real Estate, said he both “agreed and disagreed” with the concept that real estate equity-focused professionals should not assume lending activities. “Debt is debt. The way you structure it as a borrower requires a particular skill set. You definitely need debt specialists, a separate dedicated team.”
“However, it doesn’t hurt to have a real estate mindset on the team,” he added. Get the balance right so you are asking real estate questions, but you are leaving the credit questions to the debt team.”
To date, GreenOak Real Estate, which is poised to merge with Canada’s Bentall Kennedy to form Bentall GreenOak, runs real estate debt funds in Europe offering loans from senior to mezzanine. For these, the firm has raised approximately €2 billion of equity across two UK and one European vehicles.
Kalsi was speaking on the first day of PERE Asia week in Hong Kong, which was dedicated to real estate credit markets. The event, which also features keynote interviews with Ken Caplan and Kathleen McCarthy, the joint-global heads of real estate at sector giant Blackstone, and John Lim, the founder of Singapore-based ARA Asset Management, continues through the week. To see the agenda, click here.