10:28 INREV: Non-listed real estate funds sector sees debt as key challenge | |
| INREV’s
recent Capital Sources Survey, suggests a significant structural shift
in the balance between debt and equity capital – the main sources of
funding for non-listed real estate investment. But, in all, capital is reducing as a result of the financial crisis. Debt finance, in particular, has taken a battering leaving a significant funding gap, as lenders seek to de-leverage and restore their loan books to 2004 pre-boom debt levels. The net effect is that the availability of debt remains low, complicated by stricter loan criteria; higher cost margins; and the consolidation and contraction of the lending market under the impending banking reforms of Basel III. The research reveals, however, that future allocations to non-listed real estate will grow at a faster rate than the general real estate sector. Over 75% of fund managers expect commitments to non-listed real estate funds to increase and some of Europe’s main institutional investor markets also expect to see increases in real estate allocations. Market impact and regulation Many lending institutions have, however, sought to reduce their exposure to the sector and even going as far as withdrawing from real estate lending altogether especially in the UK. This trend looks set to continue. The survey also reveals that approximately 10% of fund managers have failed to secure refinancing on at least one asset due to the withdrawal of bank lenders from the market. "Like investors, lenders have lost their appetite for risk. In rationalizing their loan books they are focusing not merely on reducing the size of their real estate exposure, but on increasing the quality of it by focusing on high-quality underlying assets, in prime capital cities and core markets. "We’re seeing an understandable flight to quality and safety. This is challenging the non-listed real estate sector, but it also presents opportunities,” said Brenna O’Roarty, owner of RHL Strategic Solutions, who carried out the research on behalf of INREV. Opportunity in alternative debt products Low availability of debt coupled with high expectations for strong risk-adjusted returns on debt provision (in excess of 20% for mezzanine debt) initially presented an opportunity for the sector. Within Europe non-listed real estate funds dominate mezzanine lending and insurance companies have increased lending in the senior debt market, partly driven by the relatively higher risk-adjusted returns compared to real estate equity. Non-listed benefiting from equity As equity capital is still available; the survey reveals that allocations to the non-listed sector will grow at a faster rate than that to real estate as a whole. ‘Dry powder’ (uninvested equity already allocated to the non-listed real estate); allocated but unplaced institutional capital; and changes in investor behavior are, in part, driving this trend. The research estimates at least €65 billion of available equity (unleveraged) annually until the end of 2014. Much of this capital is coming from Europe and is dominated by UK, German, Dutch and French investors with a focus on domestic investments, or investments in the large, core real estate markets around Europe. This reflects the growth in the number of smaller and medium sized pension funds entering the sector for which non-listed real estate is a preferred mode of investment given their scale and resources. "This survey reveals a complex picture of changing capital sources. It reinforces trends we have seen elsewhere in earlier INREV studies. Debt remains constrained and expensive but equity is playing to the advantage of non-listed relative to real estate as a whole. And even if fund-raising remains competitive, new capital is coming into the sector. That in itself should be seen as a positive,” concluded Lonneke Löwik, INREV’s Director of Research and Market Information. Source: INREV, europe-re.com | |
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