Invesco Real Estate’s move to launch Invesco Commercial Real Estate Finance Trust, 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 which 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, said 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 said. “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. “Historically, it has been less accessible to both institutional and high-net-worth investors due to the domination of banks, insurance companies and the agencies. The sector presents a vast opportunity,” Rose said.
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 looking to now bring our real estate debt offerings to the high-net-worth channel, and we are seeing a real overlap of both our continued conviction around the real estate credit business fundamentally and our conviction that there is a significant opportunity for private real estate offerings to become more accessible to high-net-worth investors, just as they have been over the past decade to institutional investors,” Rose said.
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 said. “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 totaling $15.4 billion and 232 loans globally totaling $17.3 billion.
Invesco also will focus on liquid markets. “When we underwrite loans, we are looking to ensure that there are multiple sources of eventual repayment for us,” Rose said. “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
As Invesco works to scale its platform, the firm will be looking to expand its relationship with new and existing clients. “The real focus will be on groups with whom we can forge long-standing relationships as we bring a private credit strategy to the high-net-worth channel,” Rose said. “High-net-worth investors are focused on durable income, minimizing downside risk and diversifying their portfolios.”
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,” Rose said. “The past four decades were characterized by declining interest rates, a dynamic which 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 and our expectation that we will not be returning to that zero-interest rate environment anytime soon.”
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