Pulling the Levers: Is Debt an Essential Requirement for Real Estate Investment — Or Is It Just an Option?
The purpose of this article is to question whether the use of debt in real estate investment is, indeed, a prerequisite or if “unleveraged” returns are a realistic alternative. It is pertinent to ask this question at this time, as excessive debt in some property funds has harmed rather than assisted performance.
Real estate investment has frequently been associated with the use of debt. It is particularly prevalent in real estate funds, where investors pool their capital within a structure that is then invested in property and independently managed. Many pension funds are precluded from using debt when investing directly into property but investing “indirectly” via real estate funds has provided an effective way of obtaining leveraged real estate returns.
The use of debt in real estate increased dramatically in line with the availability of low-cost finance, the rapid growth of property funds and the increase in the number of funds offering more focused investm