Real estate debt funds still a favored source of capital

Real estate debt funds are continuing to gain strength, according to the 2018 INREV Debt Funds Universe report. The full Universe of 67 vehicles — eight more than last year — recorded a total target gross asset value of €33 billion ($38 billion) — up from €30.2 billion ($34.7 billion) in 2017.

The Universe results reflect investors’ stated appetite for debt funds as highlighted in INREV’s Investment Intentions Survey 2018, which showed that 23.6 percent of investors planned to increase their allocations to debt funds.  Though the increase in the number of debt funds in the Universe is relatively low at 11 percent, this is likely to increase. The Investment Intentions Survey suggests that interest is likely to come from U.S. investors hunting for opportunities to gain greater exposure to European non-listed real estate.

Other headline statistics from the report paint a consistent picture of the debt funds market. For example, over half (52.2 percent) of vehicles in the Universe focus on senior debt as their most prominent loan strategy — echoing the trends in 2017 and 2016.

Direct lending remains the most popular loan generation strategy at 35.8 percent, while 34.3 percent of funds opt for a combination of both loan acquisition and direct lending. Funds with a closed-end structure dominate the debt funds space, accounting for 88.2 percent of the Universe — a rise from 76.2 percent in 2017.

The report suggests a graduated scale of hurdle rates across the lending stack. Senior debt offers the lowest median target internal rate of return at 6.5 percent, versus 12 percent for subordinated debt (junior and mezzanine combined) at the top, and 8 percent for the aggregate of all categories in the middle.  However, there was a relatively broad spread of rates in each category.

“Traditional banks may be back in the lending game, but this report clearly indicates that real estate debt funds remain attractive,” said Henri Vuong, INREV’s director of research and market information. “They may not have become the ubiquitous source of capital that might have been expected post-financial crisis, but they offer important benefits as a diversified source of capital.  And this may be particularly relevant as we approach the cusp of a market downturn.”