Invesco sees pressure on returns in Australian debt

Its real estate team says the yield spread has come down to the lower end of ‘a reasonable range’.

The yield spreads available for credit investors in real estate projects in Australia have come down during the first quarter of this year, according to a presentation by Invesco, an Atlanta-headquartered investment management firm, at its press conference held in Hong Kong.

The firm’s real estate investment team said the yield (or returns from passive income from property rental) in both Sydney and Melbourne have come down to around five percent in Q1 2018 which is below the long-term average range of six to seven percent – a signal of higher pricing levels when acquiring properties.

“There are a lot of managers wanting to do senior and stretch-senior and even mezzanine, but if you do it by cramming down the senior [tranche] enough to get you headroom on the mezzanine then you don’t get enough of a return sometimes,” said Cheng-Soon Lau, a Singapore-based managing director of Real Estate Investment Asia Pacific at Invesco.

He added that the returns from unitranche have come down as more national players have entered the senior-stretch structures.

PDI reported in March that in addition to local non-bank lenders, a number of global players including Barings, ICG, KKR Credit, Partners Group and Bain Capital have a presence in the Australian private debt market, buoyed by the real estate debt opportunities created amid rising prices and a pull-back of local bank lending.  Soon agrees with the investment potential in the market. However, he also added that the Australian market is not that big compared to that of the US.

“To that extent, the opportunity set can be limited when the banks come back with their low cost of funding,” he noted.

PDI reported in August 2016 that Invesco provided a A$150 million ($110.9 million; € 94.8 million) senior secured loan to AMP Capital to finance Skytower, a high-rise residential project, in Brisbane, Australia. The target return rate for this loan facility ranged from 15 to 20 percent. PDI understands that Invesco made this investment from two separate credit vehicles.

On 5 July, the firm disclosed that it exited this co-investment deal in April. The exit garnered a total repayment of $67 million to one of the two funds, compared with the initial commitment of $58 million. The repayment to the second fund was not disclosed.

Invesco’s real estate team were initially intending to design the deal as an equity commitment, but the primary lender withdrew its credit facility and the developer settled the deal with Invesco which acted as a capital partner along with other investors, according to Lau.

He told PDI that this unitranche bridge-loan deal provided a structure for an early exit if the developers secured the capital to repay at an agreed stage of the project.

The capital was from one of Invesco’s funds and co-investors, a spokesperson from the firm confirmed.

It is understood that the firm’s typical real estate debt commitment size ranges from $30 million to $50 million per transaction. Invesco’s latest pan-Asian real estate debt fund, Invesco Real Estate Pan Asia Credit I, has garnered $150 million from Teacher Retirement System of Texas, according to PDI data.

Another US focused private credit fund, Invesco Credit Partners Fund, held a first close at $146.2 million according to an SEC filing recorded on 1 June. The vehicle has changed its name to Invesco Credit Partners Fund from Invesco WLR Credit Partners Fund. PDI reported last year that Invesco launched its credit fund with a target size of $500 million seeking to invest in bank loans made to stressed companies.

Invesco managed $147.9 billion across alternative assets as of 31 May, according to its public disclosure.