Investors are becoming more attracted to higher-returning real estate debt strategies, a report from investment consulting firm bfinance has revealed.
Among bfinance’s international institutional client base, demand for strategies with a higher risk/reward profile grew significantly in 2020 and has remained strong in 2021.
The firm said that investors must ensure that extra yields do not come at the expense of disproportionate increases in risk by understanding which approaches managers are using to deliver an enhanced return.
bfinance’s report said while many investors are familiar with real estate debt in its more conservative form, adding more flexibility in terms of collateral type, geography or loan-to-value (LTV), can boost the premium to three to five per cent per year.
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This gives returns of approximately four to six per cent in Europe and five to seven per cent in the US.
The report said the main risk levers in real estate debt are: increasing LTV ratios, changing the collateral, adding leverage, looking to under-served geographies and seeking distress.
“Some of the levers mentioned above have been popular for years such as mezzanine debt and higher LTV ratios, which have been used to provide outsized returns; this trend was true even before the global financial crisis,” said Trevor Castledine, senior director at bfinance.
“While this is the case, others are becoming more widely used in today’s climate: newer strategy types are more likely to tap into specific niches, such as smaller properties, riskier geographies, distressed assets and development or bridging finance.”