In the past year, several big-name investment managers, with long histories of buying and owning commercial real estate, have launched strategies through which they will write loans against it.
Among them is Tristan Capital Partners (see p. 30 for an in-depth interview with the firm). It has made its name raising investor capital for value-add equity strategies. Now, it is aiming to raise up to €1 billion to provide loans to other buyers.
According to Tristan, and other managers affiliate Real Estate Capital has spoken with, the main motivation for launching such business lines is simple – investor demand. It is getting to the point where, to cater for their investors’ needs, real estate managers need to have a debt strategy within their repertoires.
The Investment Intentions Survey 2021, published in January by the European Association for Investors in Non-Listed Real Estate, showed that 35 percent of respondents, weighted by assets under management, planned to increase their allocations to non-listed real estate debt over the next two years.
Capital allocators of various stripes – pensions, sovereign wealth funds, private family offices – see real estate credit strategies as generators of attractive risk-adjusted returns, which also offer downside protection not afforded by equity investments. In other words, lending programmes allow them to benefit from a still buoyant real estate market, while mitigating increased risk.
Covid is clearly playing a role in the formation of credit funds. Banks have dialled back their risk appetites for real estate, with the resulting liquidity reduction creating financing opportunities for alternative lenders at various points on the risk spectrum. But the growing demand for private debt strategies goes deeper than this crisis.
A US-style private debt industry has been emerging in Europe since the global financial crisis, following tighter banking regulation. Investors are now familiar with the asset class. The more experienced property debt managers say discussions with investors for first-time funds in the mid-part of the last decade involved plenty of time educating them.
Today, managers are likely to have to field detailed questions on the risk/return profile at various points of the capital stack and how they are mitigating sustainability risk. Although Europe’s real estate debt market remains somewhat niche, it is now far more sophisticated.
Those managers now turning lender seem to be doing so with long-term ambitions as the asset class becomes even more established within investors’ portfolios. There is opportunistic capital, but most managers say their lending businesses are here to stay, to complement their equity funds.
The increase in investor capital ultimately signals a greater supply of finance to sponsors from lenders which themselves know plenty about what makes a sound investment.