What investors want from real estate credit

PERE hears from an investor in each major region about what real estate debt means to their respective organization.

The PERE RED 50 has grown by almost 20 percent year-on-year to aggregate at $189.3 billion. Common to most of the institutional investors fueling this growth is a desire for more downside protection and predictable, recurring income during these currently turbulent times. Motivating factors, however, depend on the investor, as does risk tolerance.

PERE spoke with three investors to hear their respective approaches, and the debt strategies they are engaged in.

At South Korean pension fund Public Officials Benefit Association, the investor has evolved its debt investment strategy from commingled funds to more joint ventures and separate accounts. The Korean institution started investing in real estate debt five years ago via commingled funds. Today, debt currently makes up 24 percent of its overall real estate

With a goal of having 30 percent of its real estate portfolio invested in debt by 2025, POBA entered a $400 million venture with fellow investor, the US pension California State Teachers’ Retirement System. Starting in 2018, that venture has made investments in the US.

Donghun Jang, chief investment officer at POBA, tells PERE the investor favors the control factor, deployment speed and exit schedules of its direct lending vehicles. “The investments are usually more short-dated in a joint venture so the cashflow and the turnover is also better and faster,” he says.

It is understood the investor is currently in talks with CalSTRS for a potential re-up in addition to the $400 million committed so far. “Going forward, we will focus more on joint ventures and separate accounts when investing in real estate debt,” says Jang, though not at the expense of commingled funds.

Arboretum: the Paris development ticks the ESG box for Allianz

Real estate debt’s role as a substitute for fixed income has been reinforced by the pandemic, according to Jang. “After the pandemic, yield from our fixed income assets has lowered substantially. We are now considering investing in the senior secured real estate debt area,” says Jang. However, he also said private real estate debt can provide a conduit to access distressed opportunities. POBA backed a US commingled fund for that purpose last year. Lending on development, however, is where POBA draws a line.

Trend followers

It should come of little surprise that, for many institutional investors, sectors benefiting from accelerated trends such as digitization are high on the menu.

Roland Fuchs, head of European debt at Allianz Real Estate, tells PERE the investor favors resilient sectors such as multifamily and logistics, and is being more cautious with segments hit harder by the pandemic such as hospitality and retail. In December 2020, the firm closed a €195 million refinancing of a logistics and industrial portfolio in the Czech Republic managed by logistics firm CTP.

The firm’s main core and core-plus debt fund, PAREC, grew to more than €4 billion in assets by the end of 2020. Not that all its real estate debt exploits are low risk; the investor is happy to back development projects, particularly if the development carries strong ESG elements. For example, the firm participated in the €200 million ‘green loan’ financing for the development of Arboretum in Paris in July last year, the largest solid-wood office development in Europe.

Nevertheless, the investor’s general approach to real estate debt is to use it as a forerunner in markets – a cautious tack – before larger equity plays are

Sheds and beds reign

Prashant Raj, head of US real estate debt at QuadReal Property Group, tells PERE his firm’s debt strategy mirrors its equity strategy, where there is a focus on industrial, multifamily and various niche property types. “We want to be active lenders in alternatives, which the more traditional financial institutions shy away from,” Raj says. The firm issued its first data center development loan last year.

When it comes to financing the development of assets, Dennis Lopez, chief executive at QuadReal, says his firm is more comfortable because it is also an equity investor with operating and development capabilities. “If things do not work out, we can operate them ourselves or finish the development ourselves,” he says.

Whether from the US, Europe or Asia, the reasons for increasing exposures to the credit part of the real estate investment equation are increasing, even if, at the induvial institution level, there are nuances in the rationale.