How lenders are tapping into the private wealth channel

Invesco Real Estate believes there is a significant opportunity for private real estate offerings to become more accessible to high-net-worth investors.

Invesco Real Estate’s move to launch Invesco Commercial Real Estate Finance Trust (INCREF), a non-traded, credit-focused real estate investment trust, reflects two secular shifts in the commercial real estate market: more interest from investors in private credit strategies, and the ability of alternative lenders to increase their market share.

The trends that backed the launch of the REIT are complementary, particularly as dislocation in the banking sector has meant more interest from institutional sponsors in alternative lending platforms, says Charlie Rose, president and lead portfolio manager of INCREF and global head of credit for Invesco Real Estate. 

“Coming out of the global financial crisis, we started to observe a trend toward greater penetration in the commercial real estate debt industry for alternative lenders,” Rose says. “We are now observing another dislocation that we believe has the potential to significantly accelerate a trend toward a greater market share for those alternative lenders who are nimble, responsive and relationship oriented.” 

Commercial real estate debt is a roughly $5 trillion asset class in the US and is also the fourth-largest fixed-income asset class in the US. “The sector presents a vast opportunity,” says Rose. 

The firm, which launched its credit business 10 years ago, has grown its US loan portfolio to more than $6 billion and has completed more than $15 billion of originations. Invesco also has a European business, which has completed about $2 billion of loan originations. 

“We are seeing acontinued conviction around the real estate credit business fundamentally,” Rose adds.  

Lending strategy

The REIT will originate, acquire and manage a diversified portfolio of loans and preferred equity investments. Invesco will work with seasoned sponsors in markets where the firm has strong convictions, focusing on core-plus credits. It will look at properties in the multifamily, industrial, single-family rental and self-storage sectors in the core-plus space, originating floating-rate loans on transitional assets.  

“Our approach to real estate lending has always been to take a property-first approach, only lending on properties that are consistent with what we’d be buying in our equity business,” Rose says. “We will focus on top-tier institutional sponsors, and we will also follow our credit over yield approach. Our goal is to be an all-weather lender to institutional borrowers, which means we will be prudent about the leverage levels and the amount of risk we are taking.” 

The REIT has already originated its first loans, providing financing on an industrial property in Phoenix and a multifamily property in Sunnyvale, California. The loans totaled $178 million of gross commitments. Both loans were originated for third-party relationship borrowers. As of March 31, the firm had originated 180 loans in the US totaling $15.4 billion, and 232 loans globally totaling $17.3 billion. 

Invesco will also focus on liquid markets. “When we underwrite loans, we are looking to ensure that there are multiple sources of eventual repayment for us,” Rose says. “One of the most important analyses we do is to understand how liquid that market is. Over cycles, we have seen that certain markets exhibit better liquidity profiles than others.” 

Scaling the platform

Over the long-term, Invesco believes there will be sustained, long-term opportunities in commercial real estate lending because of the elevated base rate environment and the significant pullback from banks.  

“We believe we are seeing a once-in-a-decade opportunity to originate new loans with strong credit metrics at a time when interest rates are higher than anything we’ve seen since the global financial crisis,” says Rose. 

“The past four decades were characterized by declining interest rates, a dynamic [that] fundamentally created tailwinds for equity strategies. That dynamic has now flipped, with sustained upward pressure on rates creating a real tailwind for credit strategies, which we expect to persist through the medium term. It is the market’s and our expectation that we will not be returning to that zero-interest rate environment any time soon.” 

Watch this space

New York-based investment manager Fortress Management is also gearing up to expand its wealth management business, focusing on providing real estate and credit-related solutions to private investors of all sizes. Adam Bobker, managing director and co-head of wealth management at Fortress, notes that, while roughly 15 percent of the firm’s assets are concentrated in this space, the firm did not have a dedicated team for the sector until recently.

“We have been assembling and hiring a team of high-quality talent with experience within wealth management who are also able to provide our clients with market insight and educational support,” Bobker says. “Our priority is to enhance our partnership with wealth management firms working with individual investors who have historically had limited access to alternative investments.”

Fidelity Bancorp Funding, an investment management company based in Santa Ana, California, is also gearing up to expand its bridge lending platform by raising capital from high-net-worth and institutional investors, says Charlie Woo, president of the firm’s bridge lending platform.

Woo, who joined the firm in June from San Francisco-based investment bank Wells Fargo, outlined the opportunity he sees. “Regional banks originated 62 percent of all commercial real estate loans in 2022. Higher interest rates and the resulting balance sheet stress has caused these banks to tighten their purse strings, which has created a significant growth opportunity for private lenders,” he says.

Bigger picture

A March report from New York-based investment manager Cohen & Steers on the impact of volatility in the US banking sector on commercial real estate lending put the US commercial mortgage market at around $4.5 trillion, with about $470 billion of additional construction loans. Within that, Cohen & Steers found banks hold about 45 percent of all mortgages and that banks outside of the 100 largest have provided financing for 15-20 percent of all commercial mortgages.  

“When you think about commercial mortgage finance, there is actually a wide variety of lenders that provide capital to the commercial real estate market beyond banks,” says Richard Hill, senior vice-president and head of real estate strategy and research at the firm.

While the goal of the report was to unpack the amount of exposure that banks actually had to commercial mortgages, Cohen & Steers was also able to highlight the number of active lending sources in the market today. These include Fannie Mae and Freddie Mac and the growing roster of alternative lenders.  

For Woo, the future is clear: “If you have patient capital, whether it be from individuals or institutions, a track record that you can point to, and a good approach for borrowers who are seeking capital and a secure foundation for investors who are looking to put money into the space, it is a great medium to be in,” he says. 

“My prediction is that there will be more institutional money that comes into this space, but it will be commingled with individuals. Then it is long-term, patient capital from a variety of sources and can weather a lot of storms, as long as your loan portfolio is safe and producing.”