(February 7, 2013) — Institutional investors are increasingly interested in the value that real estate debt can add to their existing portfolios, Preqin has revealed.
According to the data firm, a growing number of institutions believe that these funds can generate returns with a lower level of risk than equity investments in real estate. Consequently, a significant number of investors plan to commit to funds with a debt strategy in 2013.
Thirty-four percent of real estate investors interviewed by Preqin in December 2012 are targeting debt funds during 2013, compared to just 8% in the 12 months following December 2011.
The 2013 Preqin Global Real Estate Report shows that the most successful year in terms of fundraising for solely debt-focused funds was 2008, with 33 funds raising an aggregate $13.8. Since 2008, fundraising has been slower, the firm claims, and while 2011 was a relatively successful year, with 19 solely debt-focused funds raising an aggregate $7.8 billion. Last year, eight debt-dedicated funds closed on an aggregate $2.9 billion.
The reason for the uptick? “As the availability of bank financing has fallen in the US and Europe, many fund managers, alongside other non-traditional lenders, are increasingly stepping in to help fill the funding gap,” a statement by Preqin explains.
Blackstone Real Estate Special Situations Fund II was the largest debt-focused vehicle to close in 2011-2012. The second largest solely debt-focused fund to close in the period was Fortress Japan Opportunity Fund II.
More generally, real estate has remained a firm choice with investors allocating to ‘alternative assets’ due to rent providing regular and often inflation-linked income. A survey by consultants Towers Watson and the Financial Times in July 2012 showed real estate investment companies took 40% of pension funds’ alternatives portfolios, 60% from insurance firms’, and 32% from sovereign wealth funds.
The Norway Pension Fund Global, for example, revealed its intention to enter the real estate market in the United States last year. In an interview with Bloomberg, Trond Grande, deputy chief executive officer at Norges Bank Investment Management, said the $650 billion would invest in US property “by the end of next year at the latest.” Grande continued: “The US is the largest real estate market so if you want to have a global portfolio you must have exposure to the US.”