East looks west at real estate debt

The appetite for debt has significantly increased and is reflective of a general increase in allocation to real assets, Anthony Biddulph, chief executive officer of Capra Global Partners, said at the PERE Global Investor Forum 2014 in Hong Kong this week. “I don’t think that [increase in debt allocations] is going to change anytime soon,” Biddulph said on a panel discussion, speaking to an audience comprised of global fund managers, Asian institutional investors and family offices.

In addition, tax changes to real estate investment in the US could contribute to an increased allocation of investment there, Stephen O’Keefe, fund manager at Quadrant Real Estate Advisors, said.

The sheer volume of liquidity means that it is very difficult to deploy capital, all the panellists agreed. In Europe, increased competition from banks and large insurance companies means that the most fruitful strategies will be those which look at deals with risk profiles that the larger lenders simply don’t want to pursue, Biddulph said.

O’Keefe suggested that in order to set themselves apart from banks, managers or investors need to take a longer term view. He said that there was a “real opportunity” for life companies which don’t compete with banks to carve out a niche, but warned it’s essential that underwriting standards are upheld. “The worst thing for an insurance company is to have [a non-performing loan] on their books as then the cost of capital can go through the roof,” O’Keefe said.

Biddulph concurred commenting that underwriting had in fact become even more fundamental since the pre-crisis years of 2005 – 2007. Looking at stock now, compared to the years preceding the crisis, there is a much higher proportion with very little investment today, he said.

Masanobu Fujita, head of business development at Diamond Realty Management, said that in Japan it was also difficult to deploy capital, particularly with a well-capitalized banking system. He pointed out that some managers are using lower interest rates to reach excess returns, presumably leveraging at fund level.

Biddulph advised that when investors choose a manager, if the natural competition is other private debt funds, then it is a strategy that is more likely to be sustainable.