Banks returning, but debt funds remain favoured source of capital

While many lending banks have returned to financing attractive real estate propositions despite claims they were permanently on the retreat, the 2018 INREV Debt Funds Universe report reveals the continuing strength of real estate debt funds in the European non-listed real estate market.

According to the data, the full universe of 67 vehicles – eight more than last year – recorded a total target gross asset value of €30bn – up from €30.2bn in 2017.

‘Traditional banks may be back in the lending game, but this report clearly indicates that real estate debt funds remain attractive,' said Henri Vuong, INREV’s director of research and market information.

'They may not have become the ubiquitous source of capital that might have been expected post-financial crisis, but they offer important benefits as a diversified source of capital. And this may be particularly relevant as we approach the cusp of a market downturn.'

INREV said that the data reflected investors’ stated appetite for debt funds as highlighted in its recent investment intentions survey, which showed that 23.6% of investors planned to increase their allocations to debt funds.

While the growth in the number of debt funds is relatively low at 11%, this is likely to increase, the report said. US investors are likely to increase their allocations as they seek opportunities in Europe.

Other headline statistics from the report paint a consistent picture of the debt funds market. For example, over half (52.2%) of vehicles focus on senior debt as their most prominent loan strategy – echoing the trends in 2017 and 2016.

Direct lending remains the most popular loan generation strategy at 35.8%, whilst 34.3% of funds opt for a combination of both loan acquisition and direct lending. Funds with a closed-end structure dominate the debt funds space, accounting for 88.2% – a rise from 76.2% in 2017.

INREV’s Debt Funds Universe was launched in 2013 to capture information about debt vehicles in the European non-listed real estate market.  The Debt Funds Universe is a live database which means that information can change at any time. The snapshot report is published annually in October and results are based on vehicle level data provided directly to INREV from managers.