Investor intentions signal opportunity for debt fund lenders

Strong institutional demand for more risk plays into the hands of non-bank property lenders.

Writing a cheque

Institutional investors want more exposure to the world’s real estate markets. The Investment Intentions Survey 2020 – published by industry body the European Association for Investors in Non-listed Real Estate Vehicles, its Asian equivalent, ANREV, and the US-based Pension Real Estate Association – found that European investors’ current allocations average 11.6 percent, but the target is 12.7 percent.

Investors told the survey they like real estate for its diversification benefit, enhanced returns, good risk-adjusted performance and the income it provides. In the next two years, Europe is expected to attract €39.8 billion of new capital, exceeding the €28.3 billion anticipated for Asia-Pacific and €19.4 billion for North America.

The survey also provided insight into how investors will increase their allocations to European real estate in the next two years. More than half expect to increase capital in non-listed property funds and private real estate investment trusts. Directly held property and joint ventures or club deals were cited by 31.5 percent and 27.8 percent, respectively.

But perhaps the most interesting thing for real estate finance specialists is that 20.5 percent of respondents said they expect to increase their allocation to non-listed real estate debt in the next two years.

The continued popularity of real estate among global investors is good news for Europe’s property debt fund managers. Our conversations with debt specialists in the sector suggest investors are increasingly open to putting money into lending strategies, based on the rationale that they gain access to real estate returns, with the comfort provided by debt’s downside protection.

The latest evidence of this is London-based private lender ICG-Longbow’s £500 million ($653 million; €580 million) first close of its latest senior real estate debt fund, announced on 10 January. As David Mortimer, the company’s head of senior debt, told us, such strategies might offer lower returns than products such as partnership capital funds, but they provide longer-term income, which is investment grade and cashflow backed.

Another finding of the survey is that institutional investors are keen to take on more risk as they hunt for yield. Value-add remains the preferred investment style among 42.5 percent of respondents, although 20 percent indicated a preference for opportunistic investment, up from 9.8 percent in 2019.

Those investors are unlikely to find what they are looking for in the defensive debt space. However, real estate lenders should take note of this influx of capital into riskier strategies. The managers of that money will require finance to support their investing. With Europe’s banks playing it safe ahead of the implementation of the latest round of Basel banking regulation, Europe’s non-bank lenders – particularly those that have whole loan and mezzanine funds at their disposal – are positioned to meet borrower demand for finance in riskier parts of the market.

Many in the real estate finance space argue that non-bank lenders have a long-term role to play in Europe. The continued flow of institutional capital into the space and a growing appetite for finance outside the banks’ comfort zone support their argument.