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Since the beginning of 2023, the number of managers adding real
estate debt to their product arsenal has increased significantly.
The current market environment, characterised by diminishing credit
supply, rising interest rates, and higher margins, has led to what
many managers believe to be a unique opportunity in real estate
debt, not seen in the last decade.
This article looks to demonstrate the recent growth in funds
dedicated to real estate debt, analysing the key drivers and
Buy/sell, rent/lease residential &
commercials real estate properties.
A growing number of managers are launching real estate debt
Real estate debt funds became more popular after the global
financial crash (GFC) as traditional sources of financing dwindled
due to a combination of increased regulatory scrutiny and a crash
in property values. At the time, several real estate managers
expanded into debt, particularly in the US as property values
suffered more compared to Europe. From 2007 to 2009 US commercial
property prices declined by almost 40% compared to 20% in
Europe1. During this three-year period, at least 13 new
US real estate debt managers emerged including Blackstone, Apollo,
and CBRE, compared to only three in Europe2. Since then, the
percentage of real estate managers that have a debt strategy has
steadily increased and currently 60 of the top 100 US real estate
managers have a real estate debt fund verses 36 in Europe
(including the UK).
The expansion from real estate into real estate debt appears to
have been more natural than the expansion of private debt into real
estate debt – out of the top 100 US private debt managers
only 25 have a real estate debt fund. Additionally, only eight of
those 25 managers did not have a real estate equity fund prior to
launching into real estate debt.
Source: Preqin Ltd.
This can be attributed to the specialisation that is required
when underwriting real estate loans – managers with real
estate equity practices can benefit from in-house valuation and
asset management expertise, which may allow them to better appraise
assets and manage downside scenarios if they need to take control
of the assets. The pace of regulatory change in real estate also
adds significant risk to the asset class, managers without
sufficient expertise may underestimate the potential impact this
has on the underlying asset.
Additionally, most pure-play private debt managers operate
diversified strategies and do not have sufficient in-house
resources to create a dedicated real estate debt fund. Still, there
are some examples of private debt managers expanding into this
Note: Macfarlanes analysis of Preqin data, based on the
top 100 private debt managers in the US by funds raised in the
Source: Preqin Ltd.
Currently, we are seeing a resurgence in real estate debt funds
to take advantage of favourable market conditions that have not
been experienced in the last 10 years. In 2023 so far, at least 10
fund managers have launched their first real estate debt fund
including Bain Capital, Tikehau and TPG. Existing managers are also
contributing to this growth with several announcing new fund
launches in 2023. In fact, the number of real estate debt fund
launches grew three times from 2022 to 2023.
Note: For closed end comingled funds.
Source: Preqin Ltd.
However, AUM data does not yet reflect the growth in this
strategy. When looking at the past five years, the AUM growth for
real estate debt funds pales in comparison to that of real estate
equity or private debt funds.
A possible explanation is that several funds are still currently
fundraising – fundraising in 2023 has been challenging across
asset classes, leading to fundraising periods becoming more
Still, several sources expect debt strategies to play an
increasingly larger role in real estate – according to
PERE’s fundraising data, in Q1 2023 debt represented 24% of
capital raised across real estate strategies, up from 15% in Q1
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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