Since the beginning of 2023, the number of managers adding real estate debt to their product arsenal has increased significantly. The current market environment, characterised by diminishing credit supply, rising interest rates, and higher margins, has led to what many managers believe to be a unique opportunity in real estate debt, not seen in the last decade.
This article looks to demonstrate the recent growth in funds dedicated to real estate debt, analysing the key drivers and investor demand.
A growing number of managers are launching real estate debt funds
Real estate debt funds became more popular after the global financial crash (GFC) as traditional sources of financing dwindled due to a combination of increased regulatory scrutiny and a crash in property values. At the time, several real estate managers expanded into debt, particularly in the US as property values suffered more compared to Europe. From 2007 to 2009 US commercial property prices declined by almost 40% compared to 20% in Europe1. During this three-year period, at least 13 new US real estate debt managers emerged including Blackstone, Apollo, and CBRE, compared to only three in Europe2. Since then, the percentage of real estate managers that have a debt strategy has steadily increased and currently 60 of the top 100 US real estate managers have a real estate debt fund verses 36 in Europe (including the UK).
The expansion from real estate into real estate debt appears to have been more natural than the expansion of private debt into real estate debt – out of the top 100 US private debt managers only 25 have a real estate debt fund. Additionally, only eight of those 25 managers did not have a real estate equity fund prior to launching into real estate debt.
Source: Preqin Ltd.
This can be attributed to the specialisation that is required when underwriting real estate loans – managers with real estate equity practices can benefit from in-house valuation and asset management expertise, which may allow them to better appraise assets and manage downside scenarios if they need to take control of the assets. The pace of regulatory change in real estate also adds significant risk to the asset class, managers without sufficient expertise may underestimate the potential impact this has on the underlying asset.
Additionally, most pure-play private debt managers operate diversified strategies and do not have sufficient in-house resources to create a dedicated real estate debt fund. Still, there are some examples of private debt managers expanding into this strategy.
Note: Macfarlanes analysis of Preqin data, based on the top 100 private debt managers in the US by funds raised in the asset class.
Source: Preqin Ltd.
Currently, we are seeing a resurgence in real estate debt funds to take advantage of favourable market conditions that have not been experienced in the last 10 years. In 2023 so far, at least 10 fund managers have launched their first real estate debt fund including Bain Capital, Tikehau and TPG. Existing managers are also contributing to this growth with several announcing new fund launches in 2023. In fact, the number of real estate debt fund launches grew three times from 2022 to 2023.
Note: For closed end comingled funds.
Source: Preqin Ltd.
However, AUM data does not yet reflect the growth in this strategy. When looking at the past five years, the AUM growth for real estate debt funds pales in comparison to that of real estate equity or private debt funds.
A possible explanation is that several funds are still currently fundraising – fundraising in 2023 has been challenging across asset classes, leading to fundraising periods becoming more prolonged.
Still, several sources expect debt strategies to play an increasingly larger role in real estate – according to PERE's fundraising data, in Q1 2023 debt represented 24% of capital raised across real estate strategies, up from 15% in Q1 2021.
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