Raising capital for real estate funds has been tougher over the past two years – declining to $124bn in 2017 from $128bn in 2016 and $137bn in 2016 and 2015. By contrast, however, real estate debt managers are seeing allocations increase.  In 2017 $32.3 billion was raised for closed ended debt funds, up from $22.5 billion in 2016 and $16.4 billion in 2015. In percentage terms, debt has more than doubled its share of the ‘real estate pie’ to 26% in 2017 from 12% in 2015*. That for an industry which was nascent only ten years ago. Small wonder that many large real estate asset managers are seeking to add debt to their offering.

Wider concerns around asset pricing plus perception of increased volatility risk from rising US interest rates are persuading institutions to follow the lead taken by insurance companies who have always held private credit within their commercial real estate strategy (a perceived ‘safer quadrant’). Others are rotating away from corporate bonds, considering them overvalued.  With bank retreat still in progress, there is room for new debt investors, and strong returns for managers who can find deployment opportunities. 

The US still leads capital raising, with a more mature landscape for non-bank lenders benchmarked by CMBS ($20.4bn of fresh capital was raised last year against Europe’s $10.6bn).  Investor demand for the product is global, however, and may increase substantially if large Asian pension plans follow initial testing of the market with substantial allocations. 

So what does this mean for the market and who stands to gain?  This article aims to take a balanced view of this market shift and how risks and benefits are shared.

The Borrower

Consumer benefits of choice and competition are obvious, but it is worth noting that debt funds are not price takers. Debt funds compete best in parts of the market which challenge traditional lenders, but rarely beat banks where a deal ticks all their boxes.  Having been initially sceptical of debt fund product, many borrowers now embrace these relationships alongside core bank offerings.