GLOBAL - Property debt has become a "much more interesting space" since the financial crisis, the managing director of GIC Real Estate International has said, as he discussed the Singaporean sovereign wealth fund's expansion into the European junior debt market.

Speaking at the Reading Real Estate Foundation's annual lecture on the growing influence of sovereign funds in the market last night, Chris Morrish also said the loan-to-value (LTV) ratio of the loan was "completely irrelevant" and that the nature of cash flow over the loan period was much more important.

Morrish, previously strategic planning director at Hammerson, said GIC had been providing debt in the US real estate market for some time, as the risk price was "much better" than in Europe, where banks were able to provide capital on very low margins.

He said that, prior to the most recent financial crisis, it did not make sense for GIC to move into the European debt market.

"Since the crisis, that's all changed," he admitted. "Debt has become a much more interesting space, and we have been relatively quietly building up a portfolio of loans in Europe over the last two or three years."

Morrish said GIC, which has in excess of $100bn (€76bn) in assets, had since been moving into junior loans, as senior loans did not provide the returns expected from its real estate portfolio.

He also dismissed the practice of buying pre-existing and discounted junior loan books, saying these were no longer priced at a premium for a "very good reasons".

"What we have been doing is going into the market and providing for new loans, often alongside other members," he explained.

"We have been approaching it very much like an equity investment - we are only lending to situations where we can underwrite the real estate cash flows as an equity investment. We want to understand the dynamics of these cash flow"

Morrish said it was "completely irrelevant" what LTV ratio was offered on entry to a loan.

"All that matters is what the cash flow [is] you're going to get during the period of the loan […] and what is the value of the loan going to be when someone has to repay you," he said.

Asked about the risk of defaults, he said it would be a "bad outcome" if GIC had extended a loan and it failed, but he suggested this was taken into consideration, noting that it would be "happy" to step into the shoes of a borrower and could assume any senior loans a property might have outstanding.

However, these views were not shared by all speakers, with Karsten Kallevig, chief investment officer for real estate at Norges Bank Investment Management, conceding that real estate debt did not fit within his current remit.

The Norwegian Pension Fund Global, which began moving into real estate two years ago, viewed property as an inflation hedge, Kallevig said.

Discussing the problems and opportunities of junior debt, he said: "The only thing you can be pretty sure of is that it's not going to sit out there for the next 10 years - it's going to be repaid at some point, and that's not helpful for us."

On the same grounds, he rejected closed-end funds, as he viewed Norges real estate investments, such as in London's Regent Street, as long-term holdings.

"It doesn't serve my purpose," he said, but added: "Over time, it may very well be an integral part of our portfolio."

He stressed that Norges was in no rush to invest - potentially explaining why at the end of March, NBIM had only allocated 0.3% of the targeted 5% in assets to real estate.

"For us, at this point in time, there is not a deal good enough to do it with a bad partner."

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