Real estate credit strategies face change of capital support

Some institutional investors appear to have had their fill of real estate debt funds, but others might just be getting started.

Is the appetite for real estate debt funds starting to wane? It depends on who you ask. For some investors, interest in the products has cooled. For others, their interest has only started.

A record $30.53 billion in capital was raised for real estate debt funds in 2017, according to PERE data. The strategy – which accounted for 28 percent of total capital raised last year, twice the 14 percent in 2015 and way ahead of the 18 percent in 2016 – was a notable upswing in a private real estate fundraising world that has been on the decline since 2015.

But the desire to be invested in real estate debt may be beginning to subside, according to a new investor survey from placement advisory firm Probitas Partners. The percentage of participants that reported not investing in real estate debt funds doubled from 19 percent to 38 percent over the past year.

The shift can be attributed to many investors already committing to multiple managers in the strategy and being saturated in terms of their allocation, according to Probitas managing director Kelly DePonte. The survey stands as an early, possibly first, indication that institutional capital has placed its property credit market bets and will now wait to see how these bets fare.

These investors are primarily US institutions, which were the first to flock to real estate debt funds after the global financial crisis. Of the 41 institutions surveyed, including pension plans, sovereign wealth funds, consultants and endowments, more than half were based stateside.

Of course, Probitas’ survey is one data offering. Real estate debt fund commitments may not necessarily drop significantly next year. In other parts of the world, the demand for these funds appears strong. More European institutions have become active in the space in recent years, which could help fill a gap left by US investors.

And despite the Probitas survey, a dramatic pullback from US institutions may not actually materialize. Although real estate debt fund commitments have typically been made by the private real estate teams at US pensions and other investors, one lender told PERE this week that the private debt teams, rather than real estate teams, at these organizations have shown increasing interest in the strategy over the past year. Many of these private credit groups are looking to diversify their portfolio away from corporate debt, the lender said.

Indeed, PERE is aware of one major US pension understood to be considering a commitment to a real estate debt fund through its private credit group. And the lender, which is raising its first debt vehicle, also has been in talks with other investors’ private debt teams about potential commitments.

So while Probitas’ survey indicates some investors have had their fill, real estate debt vehicles may yet remain a darling strategy for some time to come – only the interested parties may be different.

Email the author Evelyn Lee at

Private Debt Investor, PERE‘s sister title, is conducting a study on investor appetite for commercial real estate debt funds. In return for your participation, you’ll receive a complimentary copy of the results as soon as they are released. To take part, click here.