GLOBAL - The funding gap in the real estate sector, currently increasing due to the lack of available senior debt, is unlikely to be filled by pension funds and insurance companies in spite of their interest for such instruments.
Speaking at the European Real Estate Opportunity and Private Fund Investing Forum in London, several fund managers expressed concern over the lack of senior debt in the market and called on institutional investors to step into the breach.
Pension funds and insurance companies could help to fill the funding gap by providing more senior debt at a time when banks are increasingly withdrawing from their real estate lending programmes, they added.
Michael Zerda, director at LaSalle Investment Management, said: "The whole capital structure will move out in the future due to the fact several pension funds have already expressed interest in providing senior debt or investing into senior debt funds."
However, institutional investors have warned that lending debt for real estate projects requires a large amount of capital and that only a handful of insurance firms would be able to lend senior debt in future.
Patrick Züechner, head of real estate at Gothaer Asset Management, said: "Insurance companies could solve the funding gap problem, but they will have to be a regular lender in the market to provide a deal flow.
"To do so, they will need to be enormous in terms of size. As a result, only a few insurance companies will be able to provide senior debt for real estate projects."
While senior debt is becoming rare, fund managers judged the level of mezzanine debt sufficient for the time being, with more supply on the market than in October last year, especially on the secondary assets side.
Cyrus Korat, senior investment manager at Duet Private Equity, said: "Mezzanine debt is becoming much more understood by borrowers, while the acceptance of price is also more established.
"But mezzanine debt is not enough. It would help to have more lenders providing senior debt to help deals close."