Top Investors Target Real Estate Debt Amid Bank Retreat

Top Investors Target Real Estate Debt Amid Bank Retreat

Betting on Real Estate Debt Is Not for the “Faint-Hearted” Investors

Some of the world's largest investors are increasingly focusing on lending to commercial real estate as they capture market share from banks that are pulling back, betting on the end of the steep decline in property prices.

American firms PGIM, LaSalle, and Nuveen; Canadian companies Brookfield and QuadReal; British firms M&G, Schroders, and Aviva; and French company AXA all told Reuters that they plan to increase their credit exposure to real estate.

Most are focusing on lending to logistics properties, data centers, rental apartments, and high-quality office buildings. The office sector, however, continues to face challenges, limiting capital inflows.

"If I look at our strongest bet right now, it’s probably on real estate debt," said Isabelle Scemama, head of AXA's €183 billion alternative investment division.

LaSalle Investment Management, which manages $89 billion globally, aims to increase its real estate debt investments by 40% to about $7.6 billion over two years.

Not for the Faint-Hearted Investors

Betting on real estate debt is not for the "faint-hearted" investors. The global commercial real estate sector, especially offices, remains in the deepest slump since the 2007 financial crisis.

However, alternative lenders believe that the worst may be over and that they can achieve attractive returns as valuations recover.

"Historically, through real estate cycles, loans made at the bottom of the cycle tend to have the lowest delinquency rates and highest spreads," said Jack Gay, global head of real estate debt at Nuveen.

Tighter capital rules for banks, including new international standards and bankruptcies of U.S. regional banks, have created a broader market opening, companies said.

"The challenges banks face have really led to a reduction in direct lending for commercial real estate," said Brookfield executive Naila Flake, who sees opportunities for further lending.

Notably, Apollo Global Management launched its first dedicated European real estate debt fund, targeting €1 billion this year.

Major banks' asset management arms are also targeting markets. Goldman Sachs Asset Management announced on Monday that it secured its largest real estate credit fund to date, with a lending capacity of over $7 billion, including part of the company's equity and leverage.

In the UK, non-bank lenders accounted for 41% of real estate loans in 2023, more than doubling their share from 19% just nine years earlier, according to Bayes Business School data, which also showed that new commercial real estate lending in the UK hit a decade low.

Across continental Europe, the share has steadily risen to 20-30%, noted the Bayes research.

Risks to Financial Stability

The growing role of funds in lending, known as "shadow banking," worries regulators due to the risks of loan defaults and potential spillovers into the broader economy. Reporting requirements for private equity are also lighter than for banks, meaning less transparency.

European Central Bank Vice President Luis de Guindos said in March that the exposure of non-bank entities to commercial real estate was one of the main risks to financial stability in the region.

"I find it quite worrying that retirees' invested capital is affected and funds can do whatever they want without supervision or regulation," said Bayes researcher Nicole Lux.

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