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Since the beginning of 2023, there has been a significant increase in the number of business owners adding real estate debt to their products. The current market environment, characterized by decreasing credit supply, rising interest rates, and rising profit margins, has many executives believing that a unique opportunity in real estate debt not seen in the past decade is emerging. There is.
This article demonstrates the recent growth of dedicated real estate debt funds and analyzes the key drivers and investor demand.
An increasing number of business owners are launching real estate debt funds.
After the Global Financial Crisis (GFC), real estate bond funds rose in popularity as traditional funding sources declined due to increased regulatory scrutiny and a collapse in real estate values. At that time, several property management companies increased their debt, especially in the United States, as real estate values fell further relative to Europe. From 2007 to 2009, commercial real estate prices in the United States fell by almost 40% compared to his 20% in Europe.1. During his three years, at least 13 new real estate bond management companies were created in the United States, including Blackstone, Apollo, and CBRE, compared to just three in Europe. Since then, the proportion of real estate managers with debt strategies has steadily increased, with 60 of the top 100 US real estate managers now holding real estate debt funds, compared to 36 in Europe (including the UK). It becomes.
The expansion from real estate to real estate debt appears to have been more natural than from private debt to real estate debt. Only 25 of the top 100 private debt management companies in the United States own real estate debt funds. Furthermore, of these 25 of his managers, only eight of his managers did not have a real estate equity fund before starting real estate debt.
Source: Preqin Ltd.
This is likely due to the specialization required when underwriting real estate loans. Managers with real estate equity operations can benefit from in-house valuation and asset management expertise, potentially enabling them to better value assets and manage downside scenarios if necessary. Manage your assets. The pace of regulatory change in real estate also poses significant risks to the asset class, and managers without sufficient expertise may underestimate the potential impact this will have on the underlying assets.
Additionally, most pure-play private debt managers operate diverse strategies and do not have sufficient in-house resources to create a dedicated real estate debt fund. Still, there are some examples of private bond managers expanding into this strategy.
Note: Macfarlanes analysis of Preqin data based on top 100 US private debt managers by funds raised in the asset class.
Source: Preqin Ltd.
Real estate bond funds are currently making a comeback, taking advantage of the best market conditions we’ve seen in the past decade. At least 10 fund managers have launched their first real estate bond funds so far in 2023, including Bain Capital, Tikehau and TPG. Existing managers are also contributing to this growth, with several announcing the launch of new funds in 2023. In fact, the number of real estate debt fund launches tripled from 2022 to 2023.
Note: For closed-end commingled funds.
Source: Preqin Ltd.
However, AUM data does not yet reflect this strategy’s growth. Looking at the past five years, the growth in AUM for real estate debt funds pales in comparison to real estate equity funds and private debt funds.
A possible explanation is that some funds are still raising capital, and raising capital in 2023 will be difficult for any asset class, leading to even longer fundraising periods. There is.
Still, sources predict that debt strategies will play an increasing role in real estate. In the first quarter of 2023, debt accounted for 24% of the capital raised across real estate strategies, up from 15% in the first quarter of 2021, according to PERE’s funding data.
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The content of this article is intended to provide a general guide on the subject. You should seek professional advice regarding your particular situation.
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